Charter Trust - Global Market Update

Are robots eating our jobs?That’s what I wondered when I read Kellogg’s recent announcement. They’re laying off about 2000 workers, 7% of their global workforce. The company cited slack demand for their signature breakfast cereals amid competition for new items like Greek yogurt and oatmeal bars. But the real focus, it seems to me, is efficiency. The company is in the middle of an effort to consolidate production facilities and integrate global supply chains,  creating structural efficiencies and cutting costs by perhaps 10%.Revolutionary robotics and advanced automation are making it increasingly easy  to purchase and program new machines  that can do just about anything. As a result, traditional manufacturing employment, which was about 30% of the labor force in the 1950s, seems destined to continue to fall.As a result, our economy needs more and more professionals and technicians—people who can customize the machines, rather than just tend them. At the same time, we also need people who provide personal care and services. But fabricators and laborers? Not so much. Some economists have called this an “hourglass” economy: Wide on the top and bottom, hollowed-out in the middleBut the nature of work has been changing ever since the industrial revolution began in the mid-18th century. New technologies have always been disruptive, painful for those displaced, but good for the overall economy. We never run out of jobs. It may take time to learn the necessary skills, but there’s always something to do. Shipping and packing may get automated, but the firms designing and building the robots are hiring.Having a more productive economy is essential to creating higher living standards. For the foreseeable future, robotics will be part of our creative destruction.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Have we forgotten their history?Amid all the hoopla over tapping the German Prime Minister’s personal cell phone, some fundamental issues have been forgotten. Yes, many friendly governments spy on one another, and yes, the President’s national security duties are primary. We can’t just  unilaterally disarm, and many nations are more jealous than offended by the NSA’s activities.But who we spy on and how we gather that data matters. Angela Merkel grew up in East Germany, where one in every seven citizens was a Stasi informant. Nothing was inviolate. When Germany reunified, the Stasi tried to destroy so many files that their shredders broke down. They still ended up with over 16 thousand sacks of scraps.So when Frau Merkel says that such surveillance represents a grave breach of trust, believe it. She’s not going to be mollified by an “everybody does it” excuse. If Washington wants Germany to be an enthusiastic partner, it had better get busy rebuilding that relationship.Don’t debate John McCain on torture, and don’t tap a former East German’s phone. They may forgive you, but they won’t forget.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Can investors prosper from hope?Yesterday the Journal ran a story about Eike Batista, a Brazilian whose meteoric rise and fall seems to mirror the financial fortune of his home country.  Starting in 2006, he took five startups public in five years, creating a commodities empire from scratch.  His financial backers included the bond firm PIMCO, the mining firm Anglo-American, and the Ontario Teachers Pension Fund.  At one point Mr. Batista’s wealth was calculated as greater than $30 billion, and he was considered one of the 10 richest people on the planet.Then it all came crashing down.  His flagship oil exploration firm OGX sank one dry hole too many, and his lenders stepped back.  Because of cross holdings and additional leverage, the whole edifice came crashing down.  Now investors who have lost anywhere from 40 to 96 percent are trying to see what can be salvaged.Batista’s story is a cautionary tale about the dangers of emerging markets.  They’ve always had something of a boom-and-bust character.  When oil-giant Petrobras announced a huge find, it seemed that Brazil was off to the races.  Betting on a charismatic entrepreneur seemed a sound way to profit from the boom phase.But salesmanship and sloppy accounting are no substitute for engineering and production.  Announcing a find is not the same as delivering oil.  And believing in a dream isn’t enough to make it happen. Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Last night’s win by the Red Sox was sweet.Those of us who pulled our hair out year-after-year as Boston’s baseball franchise regularly faded in August and September feel vindicated as the team came back from its disastrous 2012 season with an epic turnaround. General Manager Ben Cherington deserves a lot of the credit. Last year’s mega-swap with the Dodgers freed up capital and allowed him to invest in steadier, lower-cost assets. The team also made good use of their home-grown talent—players in their first six years of service.But there’s a problem in paradise. Even though this year’s Series had over 10% more viewers than last year, the audience is getting older. According to market research firms, the average fan this year was 54.4 years old, up from 49.9 in 2009. Kids age 6 to 17 were only 4.3% of the audience for the League Championship Series this year, compared with 7.4% a decade ago.Not all of those missing kids are watching baseball on their smartphone apps. In spite of a higher population and 10 million app downloads this year, participation rates are falling: 500 thousand fewer kids are playing Little League now than in the late ‘90s. This isn’t good. Children who grow up playing the game and rooting for the home team are far more likely to be fans as adults.If baseball were a stock, analysts would approve of its recent performance but worry about its long-term prospects. The sport has to do something to improve mind-share among its future audience. Otherwise, baseball will go the way of boxing—a once great game whose star has faded.And that would be a shame. Big Papi and those goofy beards deserve better.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Is investing today too complicated?Hedge funds, ETFs, high-speed trading, flash crashes—is the market today too multifaceted and treacherous for the average investor to even understand, much less profit from?It certainly can seem that way. Because computerized exchanges have largely replaced the physical hustle and bustle of the trading floor, the market now handles far more volume at far higher speeds than it ever could before. This has opened the way for a lot of new products, some of which represent real advances for investors—like exchange-traded funds based on efficient, low-cost indices. These allow the average person to invest bite-sized sums in a broadly diversified manner.But many products aren’t advances. They’re just a way for clever marketers to convert your investment performance into their fee income. There’s a certain irreducible complexity to modern finance that precludes an easy understanding of its implications. Unscrupulous operators take advantage of this fact. That’s why ethics is the most important part of any finance curriculum.Complexity is part of life. It’s the price we pay for efficiency. But now, as always, it pays to have a trusted guide. Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Can we improve our investments by thinking backwards?Investing has been called a loser’s game. A loser’s game is one where winners simply outlast their opponents by minimizing stupid mistakes. In tennis, it’s avoiding the unforced error. In golf, it’s keeping the ball on the fairway and staying out of the bunker. And with investing its staying away from the Lehmans and Madoffs of the market.Investing legend Charlie Munger understands this when he says that many hard problems are best solved when addressed backwards. An example from everyday life might be parenting. Raising children is incredibly complex, but thinking backwards helps. Imagine all the things that a bad parent would do--losing your temper, yelling, acting arbitrary—and shun these. If you want to foster innovation on the job, think of what would stifle new ideas and stop doing that.Thinking forwards and backwards works because every avoided Enron adds to performance. And it’s a lot easier to avoid stupidity than to find brilliance.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Are computer systems the problem? A little over a year ago Knight Capital--a small broker with a large trading presence—suffered a computer glitch which cost it almost $500 million dollars, wiping out its capital and destroying the company. Newly-installed computer code didn’t interface well with legacy systems: overdrawing some accounts by billions and setting massive short positions in others. In the course of 45 minutes, the firm was gone.By contrast, it took months for Bruno Iksil, the famed London Whale, to accumulate oversized derivative positions that ultimately generated over $5 billion in losses for JP Morgan—about a quarter of a year’s earnings. Part of the reason he could establish such a large position was because entire spreadsheets were manually copied from one computer to another, and a coding error in a single cell cascaded through the system.IT systems fail all the time; they just usually don’t make headlines. That’s because they’re essentially an art-form, with equal parts planning, experience, and coding skill. If any piece is missing, the system will crash. Major failures this year include airlines, phones, banks, and—right now—health-care.Failure happens. The key is to make sure initial failures are small--and to have enough capital to cover the large ones.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

What happens at a market top? One advantage of living through the internet and housing bubbles is seeing market behavior at the extremes. There are two major players in the stock market: buyers and sellers—or issuers and investors. When equities topped out in 2000 and ’07, investors and issuers responded differently to the market’s financial incentives. What does this look like? Investors begin to be driven by momentum strategies. Momentum doesn’t care about value, it just evaluates the trend. Newsletters focus more on the 50-day moving average and less on valuation, which starts to look more and more absurd. Prominent investors pull out, or say they just don’t “get” this new market. Growth dominates value as a strategy. Pundits on television start to look younger and younger. Issuers respond as well. IPOs get bigger and bigger, even as their quality declines. Dividend yields get smaller, while stock buybacks grow. Meeting quarterly earnings goals becomes paramount, at the expense of cashflow, sales, and balance-sheet quality. Innovative financing and securitization techniques abound. Financial engineering sets the agenda. Are we near a market top now? It doesn’t look like it yet. There are some extreme valuations, but earnings seem to be keeping up. As risk of a melt-up grows, investors seem to have nothing to fear but nothing to fear. Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd direct: 603-252-6509 reception: 603-224-1350 www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

It was the best of recessions, it was the worst of recessions.Many investors have now lived through two 50% downturns. When the dot-com and housing bubbles both burst, they devastated their respective sectors and bankrupted a lot of companies. It took five years from the market bottom in 2002 for equities to surpass their previous record; it took only four years from the depths of 2009 to get back to new highs.And yet the recovery from the dot-com bubble seemed so much more complete. By 2005 the economy had made up all its lost jobs, but we won’t get back the jobs lost since 2007 before the middle of next year. What made this downturn so vicious and the recovery so tepid?The difference is finance. The epicenter of the dot-com downturn was technology, but when the housing bubble burst it also busted the financial sector. And while technology is an important part of the economy, banking is its life-blood. To use a medical analogy, a broken leg is painful and makes it hard to move, but a heart-attack changes everything. We’re still recovering from the global coronary brought on by the housing bubble.It’s possible to recuperate from a heart-attack, but your lifestyle needs to change. Right now, our economy is still adjusting.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Is American $17 trillion in debt? That’s the headline number that’s referred to in all the debt-ceiling budget-busting filibustering debate. That’s the total of US Treasury debt that’s owned by the public, the Fed, and the Social Security Administration—along with various trust funds. But some people are challenging that figure. Stanley Drukenmiller—a legendary investor, who famously helped break the Bank of England in 1992—maintains that the national debt is actually $205 trillion. That’s the present value of all Federal promises from here to eternity--healthcare, social security, highway maintenance, everything. It’s roughly 13 times the size of the economy.But there’s another way of calculating the debt—as debt held by private bondholders. By this calculation—subtracting out Social Security and the various Federal Trust Funds—the Federal Government owes a little less than $12 trillion—about two-thirds of the economy.So which is it? In a way, both figures are right. Our iron-clad court-tested obligations are relatively modest. But our expansive current system—with healthcare and an inflation-indexed annuity guaranteed by the Federal Government—is huge. If something cannot continue it will stop. But promises mean something—and changing them costs something.The contractual promises of the Government are modest. But the political promises are immense. If we can’t find a way to make our reach fit within our grasp, our economy will not lead the world. And that will be a shame.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Is plastic the future?In the movie The Graduate, a minor character tells Dustin Hoffman that the future is in plastics. Strong, cheap, and light, the miracle material seemed to offer endless possibilities. That line may have been parodied endlessy since the 1967 film first came out, but many manufacturers have used plastic to make their products cheap and light.The problem is, a premium product that uses plastic may just seem cheap, and fail to justify its premium price. That’s what may be happening with Apple’s iPhone 5c. Rumors are swirling that Apple is cutting production of the model, even while boosting output of the 5s. Apparently people don’t want to pay over $500 for a plastic phone.There’s always a risk when companies develop a down-market model that over-exposure can tarnish the image and hurt sales of their premier product as well. That doesn’t seem to be happening to Apple, as sales of the 5s seem to be doing just fine. And Apple may be expanding its product line in order to begin segmenting the market and learn about consumer price-sensitivity.In any case, it appears that Steve Jobs’ strategy to focus on high-end consumer products that carry cachet is still working. It’s branding—not plastic—that continues to be the future.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Were the problems at heathcare dot gov predictable? That’s what many are saying. Lost passwords, reset identities, servers crashing—the web-site’s problems have been the talk of the tech world ever since it launched on October 1st. Did anyone see this coming?They should have. Large software roll-outs are often fraught with problems. Remember Windows Vista or Apple Maps? Having millions of users putting a new product through its paces in unexpected ways is bound to raise unforeseen issues—just consider the Mustang II or Chevy Vega—and new web sites are always problematic. But government is especially ill-suited to deliver a new tech product. Rules designed to prevent fraud and abuse also make effective innovation almost impossible.For example, the DEA still uses Windows Server 2003 in its network architecture. Back in the ‘90s, when new PCs would come pre-loaded with Windows, they would get reformatted back to DOS—because that was approved. With a byzantine organizational structure, any mass product the Feds design and deliver will likely be equally convoluted. Indeed, Conway’s Law virtually guarantees it.The system will be fixed—indeed, it must be fixed—but no one should be shocked that 55 major contractors working under legislative deadline and myriad federal rules produced a confusing, bug-ridden product. In the meantime, several large State-run exchanges are working fine, and consumers can always go to Plan B: sending in an application on paper.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

In 1955 James Dean starred in a movie about a troubled teen from a troubled family who gets provoked into a game of “chicken” with a local bully. Is that what’s happening in Washington? Congress is deadlocked. The government shutdown and impending debt limit are disrupting peoples’ lives and potentially the global economy. We’ve discussed before how political dysfunction in Washington could derail our modest economic expansion. Laws currently on the books need to be reauthorized or expanded periodically, but by not doing this, Democrats and Republicans are both playing “chicken” with the economy.In the movie, James Dean and a local bully drive stolen cars towards a cliff. The first one to jump before out is deemed “chicken” and loses face with the local gang. Tragically, the bully’s leather jacket gets caught in the car door and he goes over the edge. Could Congress and the President similarly have something unexpectedly go wrong that would send our economy over a cliff?At one point Dean turns to his bickering parents and yells, “You’re tearing me apart!” That’s about how I feel about this crisis. Just get it done.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Gene Fama won the Nobel Prize in Economics. This is important? Fama is one of my heroes. He has been associated with the idea of efficient markets for years, but his true accomplishment is even more significant. The Efficient Market Hypothesis posits that markets discount information, and that the more public the information, the more completely it is reflected in stock prices. As an undergraduate around 1950 Fama worked for a stock forecasting service and found that predicting prices was really hard. He hit on the EMH, and the rest is history. Or maybe not. He also found that there are systematic effects on stock prices from firm size and from firm valuation—small firms become big firms, and cheap companies mean-revert to fair value. He quantified these factors and published his work, setting off a race among researchers to find other predictors of excess returns in equities. It’s not often you get to contradict your own seminal research, and still keep your day job! It’s hard to overstate Fama’s importance: he—along with several others—created the intellectual underpinnings of two major portions of the finance industry. Index funds rely on the long-term market efficiency, and hedge funds rely on systemic anomalies that can arise and persist, often for years. The fact that both industries are thriving speaks to the enduring value of Fama’s insight. And it’s always amusing when critics of efficient markets recommend investing in low-cost index funds. Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd direct: 603-252-6509 reception: 603-224-1350 www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Can smart-phones do everything? A new company is trying to find out. The enterprise is called Silvercar, and it’s using mobile technology to change the airport car-rental business. The firm’s entire fleet consists of silver Audi A4s, a nice, mid-sized sedan. The innovation is that the entire process—from reservation to pick-up to unlocking the car to dropping it off—can be managed from an iPhone or Android app. Wireless and paperless, the service is just starting up but currently seems competitively priced. Rental companies have been catering to business travelers for years, simplifying the process in order to speed it up. But I’ve always run that race from the airport gate to the rental desk with a sense of dread—wondering what car will be available, hoping a 747 didn’t just dump a load of non-English speaking tourists into the check-in line right in front of me. And the priority plans are pretty pricey. But mobile plus travel is changing the equation. By taking advantage of customers’ technology, this service is cutting costs and improving the experience. Zipcar is doing much the same thing in urban locations. It still can’t do the dishes, but your smart-phone is getting smarter. Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd direct: 603-252-6509 reception: 603-224-1350 www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net