Charter Trust - Global Market Update

No one likes to lose. Public Domain. Source: Wikipedia We’re a culture that thrives on winning. We don’t even like to think about losing. This holds true in sports, in relationships, and in finance. When a choice is presented between winning and losing, we fear the loss about twice as much as we value a […]

How do people deal with their student debt? Source: St. Louis Fed Student debt is soaring. The cost of college is skyrocketing, but in our knowledge-based economy, education is more important than ever to financial success. Some people think a college degree is little more than signaling: the degree on your resume tells a prospective […]

Are you a fiduciary? Many of us are without realizing it. Parents are fiduciaries for their children. Teachers are fiduciaries for their students. Adult children can be fiduciaries for their parents, if the parent becomes disabled in some way. A fiduciary is anyone in a position of trust, who is supposed to act on behalf of someone else—making the decisions that they would make, if they had the fiduciary’s knowledge and capabilities. Fiduciary duties are a common-sense approach whenever someone is supposed to work on your behalf. If we hire a contractor, we’d be upset if he didn’t tell us that the front door he purchased at Lowes cost a thousand dollars more than the same door at Home Depot. But for some obscure reason, many financial advisors aren’t held to a fiduciary standard. They’re paid commissions they don’t have to disclose and commit people to products that don’t make any sense—all because of a depression-era law that was a political compromise at the time. But since Congress made financial products a “buyer-beware” good some 75 years ago, Congress is trying to fix it now. They’ve put IRAs and other consumer accounts under the Department of Labor’s jurisdiction, which administers the rules for company retirement plans. The DOL hasn’t finalized its new standards, but they’re supposed to impose fiduciary standards on the brokerage industry. But you know that when a Federal Agency gets involved setting standards, the result will be myriad rules, regulations, and exceptions that will make the operating manual for a jet fighter clear by comparison. This is all because common sense just isn’t very common. When you’re put in a position of trust, you need to act in the best interests of the person who trusts you. Douglas R. Tengdin, CFA Chief Investment Officer Phone: 603-224-1350 Leave a comment if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd www.chartertrust.com • www.moneybasicsradio.com www.globalmarketupdate.net

Do our emotions work against us? Source: Wikipedia They can with investing. Our own fears or doubts or arrogance get in the way. For example, most of us are afraid of losses: the pain of losing money is a lot worse than the regret we might feel by missing out in an up market. So we leave our money in safe, low-interest bank deposits rather than risk it in a volatile market, even though we know inflation is eating it away. On the other hand, we also suffer from hindsight bias: in retrospect, an uncertain outcome seems obvious. And we kick ourselves for missing out on Apple or Amazon’s meteoric rise. To be successful, we need to manage our passions as much as we manage our money. Shakespeare understood this. His plays are full of characters undone by their emotional state. Macbeth’s fears lead him first to murder his king, then his best friend. Hamlet’s doubts prevent him from accomplishing his personal mission just when it might have been successful. Coriolanus’ pride and disdain for the masses keep him from showing off when it might have saved him. Their own flaws are what bring these heroes down. The lesson is that we need to have strategies for dealing with our fears, rashness, overconfidence, or procrastination. There are ways to do this: hiring a money manager, or avoiding listening to daily market chatter in order to stick to a long-term strategy. But we need to manage ourselves first. Being emotional is part of being human. But we need to rule our feelings, not let our feelings rule us. Douglas R. Tengdin, CFA Chief Investment Officer Phone: 603-224-1350 Leave a comment if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd www.chartertrust.com • www.moneybasicsradio.com www.globalmarketupdate.net

Can we learn from our mistakes? Scuptor: Luigi Bartolini. Source: Art Parks International We all have regrets. Why didn’t I finish my degree? We should have gone camping last summer. Why did I send that email? “If only” thinking plays a big role in our lives. In general, our emotions send us helpful messages. Ignoring them can mean we persist in counterproductive behaviors and we miss opportunities to improve ourselves. But not always. When it comes to investing, “if only” thinking can lead you to chase the latest hot stock or asset class. In our portfolios, if we measure our success by comparing all of our investments to the top performers, then we’re doomed to be unhappy. When we look at stock and bond returns over the past decade, US stocks have returned about 7.5% per year, while US bonds and international equities have returned about 4.5%. Does that mean it was a mistake to include bonds and global stocks in a portfolio? Not necessarily. During the financial crisis, bonds were an island of stability in a period of global tumult. And just because non-US equities have lagged the US lately doesn’t mean that will continue to do so. By many valuation measures, global stocks are significantly cheaper than their domestic cousins. Source: Bloomberg If every sector in your portfolio is doing really well, you’re either really lucky or too concentrated. Diversification is the complement that humility pays to uncertainty. We don’t know the future, so we spread our bets across as many different asset classes, industries, sectors, and countries as is reasonable. Being truly diversified means that there will always be a part of a portfolio that looks awful. The math of diversification makes sense, providing the best risk-adjusted returns over time. The psychology of diversification can be challenging, though, especially when we’re tempted to think, “If only I had put all my money into Apple or Amazon 10 years ago. It would have grown over 10-times!” But this decade’s Apple could turn into the next decade’s oil patch. Sure things are never sure, and what seems obvious in retrospect isn’t clear ahead of time. It’s good to learn from our mistakes, but only if we take away the right lessons. Jumping on the latest fad is a pretty predictable way to under-perform. But we also need to acknowledge that while diversification is good for our portfolio’s health, it’s a medicine that tastes bitter at times. Douglas R. Tengdin, CFA Chief Investment Officer Phone: 603-224-1350 Leave a comment if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd www.chartertrust.com • www.moneybasicsradio.com www.globalmarketupdate.net

Can we all be above average? Source: College Board, ETFReference Of course not. That’s mathematically impossible. By definition, half the people surveyed for any characteristic will be above average, and half will be below average. But if you ask a group of people to rate themselves in many traits—driving, or generosity, or leadership skills—a vast majority will rate themselves above average. Supposedly, this overconfidence is a source of investing difficulties But that’s only true for some characteristics. If you ask people to rate their artistic ability, or how beautiful they are, or the quality of their singing voice, a vast minority will say that they’re above average. It seems that we overestimate our abilities when the skill is intangible, like intelligence, and we underestimate our abilities when the results are easily seen—like drawing or musical abilities. And we’re especially likely to rate ourselves below average for these skills in a social setting where we know the other people in the group. This does have profound investment implications. When people are convinced that their view of the world is “right,” they invest accordingly. In financial markets, we can generate an informed opinion by reviewing other research, examining company financials, and looking at price action. When the market confirms (or denies) our expectations, our confidence grows. But we’re selective in what we remember, so we become irrationally over (or under)-confident. This can lead to market manias and bubbles—as well as crashes and depressions, where prices diverge widely from their fundamental values. Prices go up because they go up, and down because they go down. Price momentum builds on itself, until valuations reach absurd levels. (Perhaps explaining why FANG stocks are currently priced at 100 times earnings—“priced for perfection”?) Source: Bloomberg Eventually, though, reality has its revenge. The world never turns out to be as rosy or as gloomy as momentum-driven market prices predict. Value-oriented investment strategies eventually outperform, but they sometimes have to endure long periods of underperformance to get there. John D. Rockefeller once said that good leadership consists of inspiring average people to do superior work. In the same way, good investing is finding average companies that can deliver superior performance. Douglas R. Tengdin, CFA Chief Investment Officer Phone: 603-224-1350 Leave a comment if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd www.chartertrust.com • www.moneybasicsradio.com www.globalmarketupdate.net

Can investors learn something from the SATs? Source: Pixabay It may be only a few more days to Christmas, but it’s also college application season. A lot of high-school seniors are filling out the Common App, writing and re-writing essays, and anxiously awaiting their latest test scores. And there’s a test-taking technique that kids use to improve how they do on standardized tests that can help investors. It’s elimination. When they come to a question to which they don’t know the answer, they can improve their scores by eliminating what is most clearly wrong. In a multiple-choice test, someone just filling in the circles gets 20 or 25% correct by random chance. But by eliminating the obviously wrong answers, students can better their odds. They won’t guess right every time, but they’ll do better than if they had left the answer blank. In the same way, investors can do better by eliminating what’s wrong. If a company’s business model makes no sense—if you can’t figure out how they earn their money—then don’t own that business. If management seems to focused more on politics and celebrity than capital investment and HR, don’t buy the stock. This is a variant of The Loser’s Game by Charlie Ellis. We can be smart by avoiding dumb ideas. For example, in December of 2000 Enron employed 20,000 people and claimed revenues of over $100 billion. But some analysts started looking in depth at their derivative books and couldn’t figure out how the company was earning all their money. There was a gap between what was reported and what they could confirm. We know how this story ends: Enron filed for bankruptcy in December 2001. The executives used a willful, systematic, and intricately planned accounting fraud to inflate their earnings. Enron stock. Source: Bloomberg Investors would have improved their relative performance by avoiding Enron. That was difficult to do: the company was a media-darling, considered a high-flying harbinger of the new economy. It had tremendous price momentum. But it was hard to see how they could turn 2% growth in utility revenues into consistent double-digit earnings growth for themselves. By looking under the hood—understanding the business, reading the financials—investors can sometimes avoid the big flops. And just like when kids take the SATs, if you can improve your odds—in a low-return world—that just might be enough.   Douglas R. Tengdin, CFA Chief Investment Officer Phone: 603-224-1350 Leave a comment if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd www.chartertrust.com • www.moneybasicsradio.com www.globalmarketupdate.net

What did the Fed just do? Narrowly considered, the Fed simply changed the wording in their periodic statement, announcing that the range for inter-bank interest rates—Fed Funds—would go from zero to .25% to .25% to .5%. In other words, the rate will move from “essentially zero” to “almost zero.” Practically, if a bank borrows $1mm from another bank overnight, they’ll have to pay $13.89 rather than $6.94. You could almost call this the “Macbeth” interest rate move: full of sound and fury, signifying—nothing. But it’s not really nothing. Rate increases are like potato chips: the Fed can’t do just one. They’ve started to raise rates 12 times since World War II. In 11 of those 12 times, they’ve kept going until the economy tanked. That’s why Chair Yellen was at pains to emphasize the moderate pace of rate increases she and the Committee expect to take. Between the official statement, her opening remarks, and the subsequent Q&A session, Yellen used the world “gradual” or “gradually” at least 10 times. Message sent. And it appears that the message was received. Normally, the stock market falls when the Fed raises rates. But this time stocks rallied: the Dow rose over 200 points; the S&P and Nasdaq went up 1.5%; stocks in Europe and Asia rose over 2%. Even bonds did well. After some volatility, the 10-year US Treasury note now yields roughly what it did three days ago, and less than it did a month ago. What’s next? It all depends on the economy. If we continue to live in a slow-growth, low-inflation world, nothing much will change. Consumers will keep spending, companies will keep hiring, markets will expand. But it never works out that way. Something unexpected will come along that shocks us. How efficiently our economy adjusts, how resilient we are—to borrow another line from Shakespeare—that is the question. Douglas R. Tengdin, CFA Chief Investment Officer Phone: 603-224-1350 Leave a comment if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd www.chartertrust.com • www.moneybasicsradio.com www.globalmarketupdate.net

History repeats itself. That’s what I thought when I read about Quebec’s maple syrup rebels. Quebec is the Saudi Arabia of maple syrup, producing 70% of the world’s supply. And it’s no wonder: with its cold winters and long, muddy springs, the province’s climate is ideal for creating a long, active run for their millions of acres of maple trees. Since the Province dominates production, they can control the market. 25 years ago, maple syrup prices were rock bottom—half of what they are now. Farmers organized a cartel—the Federation of Quebec Maple Syrup Producers—to control how much of Quebec’s syrup could be exported. They set the price for how much they pay producers, and they charge a 12-cent fee for every pound sold. Producers can only sell a very small amount independently—just to visitors to their farms, or to local markets. And they still have to pay the commission. Under the Federation’s control, prices have almost tripled. The result is what happens whenever a cartel raises prices: producers start cheating. Their individual benefits outweigh the cost to the total system from over-production. They also claim that the arrangement means they don’t own their own syrup any more. So they smuggle their syrup across the border into New Brunswick, or find other ways to outfox the system. Naturally, the Federation has taken a dim view of such activities. Backed by the Canadian courts, they have their own security staff, and can impound production and sue producers for selling syrup outside their system—sometimes amounting to hundreds of thousands of dollars. Cartels usually fail because they can’t enforce production quotas. They usually last a few years, then break up. This cartel has lasted longer, in part because Quebec is so dominant, and because maple syrup is homogeneous: you can’t taste much difference between Ohio’s grade-A syrup and Quebec’s. Also, demand for the syrup is fairly stable. But more efficient farmers are penalized: they should be able to profit more from greater production, but there’s less incentive for them to innovate. Eventually, low-cost producers will find a way to get their product to the market. Either that, or Vermont and New Hampshire will learn how to frack their maple forests.   Douglas R. Tengdin, CFA Chief Investment Officer Phone: 603-224-1350 Leave a comment if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd www.chartertrust.com • www.moneybasicsradio.com www.globalmarketupdate.net

Are worries about climate change destroying OPEC? Last week OPEC died. Nigerian oil minister Ibe Kachikwu announced that OPEC would abandon its nominal target of 30 million barrels per day. Instead, every country would set its own target. Saudi Arabia will continue to pump around 10 ½ MMBD—close to a record. Iran won’t accept any curbs until after they restore their oil shipments. A cartel is supposed to limit supply in order to raise prices. If the members can’t agree on production cuts, it’s not a cartel any more. Why is this happening? Part of the reason has to do with fracking and the rise of domestic US oil production. North Dakota and Texas now produce more oil than every OPEC country save Saudi Arabia. When the Saudis began to ramp up last year, they indicated concern that they were losing global market share to the frackers. For decades Saudi Arabia has been the world’s swing producer, cutting and expanding marginal production to meet marginal demand. That gave them enormous leverage over oil prices. By pumping flat-out, they effectively abandoned this role—hoping that North Dakota and Texas would fill it. But part of the reason also has to do with concerns about climate change, CO2 emissions, and the prospects for a carbon tax. Negotiators are meeting now in Paris to hammer out an agreement on greenhouse gasses. Any limitation on fossil fuel means that the market—and therefore value—of future oil production is uncertain. So oil is potentially worth a lot more today—even at currently depressed prices—than in the future. There is every incentive to get as much out the ground as possible as soon as possible. For now, this means cheaper heating oil, gasoline, and petro-chemicals for consumers around the world. In the long run, this will help the global economy, as more money is allocated towards other goods—goods that can make people a lot better off. In the short run, however, there will be some economic dislocation, as oil prices find a new clearing level, and companies adjust exploration and production levels. A petroleum engineering degree from South Dakota School of Mines might not be so lucrative any more. J. Paul Getty once described his formula for success as rise early, work hard, and strike oil. But in the energy business now, you’ll have to get your product to the market before new regulations and taxes are put in place. Or else strike a different kind of oil. Douglas R. Tengdin, CFA Chief Investment Officer Phone: 603-224-1350 Leave a comment if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd www.chartertrust.com • www.moneybasicsradio.com www.globalmarketupdate.net

Nature is diverse. Source: NOAA Whether down in the depths of the sea or soaring in the Himalaya Mountains or out on the African veldt, we find a broad array of plants, animals, fungi, and microorganisms. Wherever there’s a source of energy, there’s something out there that uses that energy to grow, reproduce, and spread. That’s why the discovery of deep sea geothermal vents by the crew of the Alvin in 1977 was so revolutionary. They found a whole community of tube worms, clams, limpets, and shrimp that feed off the bacteria that in turn get food from the chemicals in the vent fluids. There’s a whole ecosystem down there supported by geothermal energy. Nature’s diversity allows it to recover quickly from disasters. In 1980 Mount St. Helens in Washington State erupted with enormous force, creating a zone of devastation over 200 square miles. But traces of life survived beneath the debris: seeds, spores, and fungi. Within a couple years, a few hardy plants had colonized the area. Several decades later, satellite images show the mountain covered by a rich carpet of forest and grasslands. Source: US Geological Service Our investments should follow nature’s example. Invention and ingenuity allow for commerce and production in almost every sphere imaginable: from nomadic desert tribesmen conducting tourists across the Sahara to people arranging helicopter commutes via their smartphones. By diversifying globally across various sectors and industries, into small, mid, and large-cap companies we participate in the broad spectrum of human resourcefulness. And when there’s a disaster, a diversified portfolio comes back much more quickly. I’m not saying that diversification is simple or that it provides a free lunch. But the best way to benefit from the amazing creativity of the human spirit is to have part of our portfolios exposed to as much as possible. There’s a line about this in the new musical Hamilton: “When you’ve got skin in the game, you stay in the game. But you don’t get a win unless you stay in the game.”   Douglas R. Tengdin, CFA Chief Investment Officer Phone: 603-224-1350 Leave a comment if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd www.chartertrust.com • www.moneybasicsradio.com www.globalmarketupdate.net

Do safety measures encourage us to take more risks? Photo: Magnus Manske. Source: Wiki The US Forest Service was created in 1905. Teddy Roosevelt signed the bill in response to a series of disastrous forest fires, like the Great Hinckley Fire of 1894. These fires threatened future commercial timber supplies, and the Federal Government had begun to establish national forest reserves. Why create them, people wondered, if they were just going to burn down? So the Forest Service established a systematic approach to fire control, building a network of roads, lookout towers, ranger stations, and communications. They also offered financial incentives for states to fight fires. With new technology, like airplanes, smokejumpers, and chemicals, they established their 10 am policy: every fire should be suppressed by 10 am the day following its initial report. But a funny thing happened: by eliminating fire from the forest ecosystem, a lot of dead wood and other fuel accumulated over time. This insured that when fires did break out, they would become far more destructive. Moreover, scientists noted that fire was an essential part of many plant and tree life cycles. The Forest Service changed its approach from fire control to fire management—letting naturally occurring fires burn, unless they threatened developed areas. Is this part of what led to the Financial Crisis of 2007-2009? During the 25 years prior, economists had noted that more effective bank regulation and monetary policy had led to a “Great Moderation”—a significant dampening of the business cycle in the US and other developed nations. Source: Lawrence Khoo, FRED, Wiki It’s possible that reduced economic volatility led investors, homeowners, and banks to take on greater risks. In essence, the Fed’s policy of fire suppression allowed toxic assets to be created and distributed throughout the financial ecosystem. Highly regulated (and insured) banks were replaced by (uninsured) shadow banks. These assumed particular risks and contributed to a culture of increased systemic risk. When some of their assets began to unravel, it was impossible to contain the damage. We find a sort of risk-homeostasis in other areas. Anti-lock brakes encourage more aggressive driving; better skydiving gear allows hazardous high-speed maneuvers close to the ground. This is sometimes called the Peltzman effect: people behave as if they want a certain level of risk in their lives. This appears to be the case with ecosystems and economies, too. Are safety measures useless, then? Absolutely not! The rate of accidental fatalities has fallen dramatically over time, and there are also fewer bank failures. But like the US Forest Service, we need to focus on risk management rather than risk reduction. Don’t assume government regulators will control your financial risks. Diversification, analysis, and—above all—not paying too much are still crucial, and always will be. The biggest risk, after all, is believing that we aren’t taking any risk. In a dynamic world, that’s guaranteed to fail. Douglas R. Tengdin, CFA Chief Investment Officer Phone: 603-224-1350 Leave a comment if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd www.chartertrust.com • www.moneybasicsradio.com www.globalmarketupdate.net

What happens when the Fed starts to raise rates? Photo: Kim Shiflett. Source: NASA Many investors are worried about the value of their bond portfolios. When interest rates rise, bond prices fall. It’s simple mathematics: bonds have a contractual future payment stream, and that payment stream isn’t worth as much when the discount rate rises. With the Fed now poised to raise rates, their portfolios may be at risk. As a result, many investors have shifted to short-term bonds, because short-term bonds are less sensitive to interest rates than long-term bonds. But just because some interest rates rise doesn’t mean they’ll all go up. It depends on the type of bond, the credit quality, and when the bond matures. All bonds carry a certain degree of credit risk; there’s always a chance that the issuer won’t be able to pay its obligations on time. As the economy improves, the risk of default goes down. And long term bonds are different than short term bonds. Inflation risk is a much bigger issue. When the Fed lifts rates, the risk of inflation may actually go down. So even if rates rise in one part of the yield curve, they may not go up elsewhere. We saw this play the last time the Fed raised rates. Between the end of 2003 and 2006 the Fed increased interbank rates from 1% to 5.25% over the course of two years. The economy was recovering from the dot-com crash, and the Fed moved from an easy policy to a fairly restrictive stance. This was a pretty aggressive set of moves on the Fed’s part. Fed Funds Rate from 12/31/02 to 12/31/07. Source: Bloomberg But interest rates didn’t move up uniformly across the curve. The Fed had been pretty clear about its intentions. Then, as now, they were anxious to return monetary policy to a more normal stance. There had been lots of speeches and comments by FOMC members. So the market had largely anticipated rising rates. Consequently, as the Fed began to increase rates, long-term rates didn’t go up very much. In fact, long-term corporate bond yields actually fell a little bit. It’s hard not to look back at those rates with a little bit of nostalgia: investors could actually receive over 6.5% for a 15-year corporate bond! BBB Corporate Bonds from 5/31/04 to 7/31/06. Source: Bloomberg Similar to back then, the Fed has been especially clear about their intentions lately: they want to return monetary policy to a more normal stance, with short-term interest rates close to the rate of inflation. So the bond market has largely anticipated their expected policy actions. Currently, Fed Fund futures imply a 76% probability that the Fed will lift rates at their next meeting. If they do, it’s quite possible that longer rates will remain stable or even fall. The yield curve could flatten. Sometimes, what seems riskier is actually safer. Douglas R. Tengdin, CFA Chief Investment Officer Phone: 603-224-1350 Leave a comment if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd www.chartertrust.com • www.moneybasicsradio.com www.globalmarketupdate.net

What’s happening with the Chinese Yuan? Photo: Dodgerton Skillhause. Source: Morguefile When the People’s Bank of China devalued their currency by 2%, there was an immediate market reaction. Some other Asian currencies quickly followed—the Singapore Dollar, the Malaysian Ringgit. There was discussion of an impending currency war. Stock markets around the world tumbled. One month chart of Asian Currencies: Aussie Dollar (orange); Korean Won (red); Chinese Yuan (blue); Singapore Dollar (green); Malay Ringgit (yellow). Source: Bloomberg  But I all I could think of was the Peggy Lee song from the ‘60s: “Is That All There Is?” I used to run a bank treasury in North Africa where exchange rates were managed. The central bank would regularly intervene in the marketplace depreciating (and appreciating) their currency—often around scheduled debt payments. Five and even ten percent adjustments were common. Apart from hurting a few aggressive forex trader’s though, the immediate effects weren’t very dramatic. Longer-term, perhaps a few more European tourists booked beach vacations on Africa’s northern coast. And there was no currency war between Tunisia and Morocco and Egypt. China’s economy has been slowing for years. But their currency has been set higher and higher, in part to counter claims that they were dumping their products on their trading partners. A weak economy usually leads to a weak currency, when the exchange rate is set by the market. Since China has a managed forex regime, eventually its money had to catch up with where the market would have taken it. By lowering their exchange rate, they can stimulate their economy without encouraging speculation in the stock market. So don’t get too worked up about a 2 or 3% move. As Peggy Lee sings, “If that’s all there is, then let’s keep dancing.”

Wild geese that fly with the moon on their wings, These are a few of my favorite things   Photo: Gracie Stinson. Source: Morguefile My favorite financial ratios combine a company’s efficiency at generating cash from its marketplace with a willingness to deliver cash to their shareholders. I focus on three indicators: Return on Invested Capital (ROIC), Cash from Operations divided by Net Income, and Shareholder Yield. It’s a fine theory, but how well does it work in practice? Let’s compare two tech giants, IBM and CISCO. They aren’t exactly the same, but they have similar business models—selling hardware, software, and services to other companies. Over the past 10 years, here’s how these financial ratios and total return looked: Data Source: Bloomberg  Over the past ten years IBM has had a superior ROIC and has returned more cash to its shareholders. Its shareholder yield has been roughly 3% higher than Cisco’s, and their total return for the time period has been about 2% per year higher. Both companies appear to have similar ratios of cash from operations to net income. But analyzing how these ratios have changed over time provides even more insight. Source: Bloomberg Cisco started out with a 20% ROIC, and their stock boomed. But IBM gradually increased its ROIC from 10% to 20%, while Cisco’s went the opposite way, and their equity prices followed suit—until recently. But note their cash flow! Over the past decade, IBM’s cash flow to net income ratio has halved, falling from 2.0x to 1.1x. Recently, their free cash flow hasn’t even been sufficient to maintain their stock buyback program, and they’ve borrowed to support it. Obviously, this can’t continue: the balance sheet will become bloated, and ROIC will fall. This may be part of the reason why IBM’s share price has fallen since early-2013.  These indicators provide an interesting picture of why the equities of the two tech titans may have performed as they have. Both firms are solid, blue-chip companies committed to their shareholders, although their financials have diverged. We know that valuation matters, but economic performance matters too. Hopefully any silver, white, wintery problems they are having will melt into a spring of positive returns. Douglas R. Tengdin, CFA Chief Investment Officer Phone: 603-224-1350 Leave a comment if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd www.chartertrust.com • www.moneybasicsradio.com www.globalmarketupdate.net