Charter Trust - Global Market Update

What if they held an election and nobody noticed?That's the situation in Germany right now. Their federal elections will be held in a month, but German voters don't seem to care. In spite of scandals involving defense procurement or plagiarism by her ministers, Angela Merkel remains well-liked. It is widely seen that this election will have a significant impact on the future of the Euro, but the German public just isn't that engaged.Recent polls indicate that less than a third of voters are following the election and fewer than half could even tell you when it is going to take place. When the ruling party has a popular leader and the opposition party doesn't put a credible alternative forward, this kind of apathy is the result. In a head-to-head contest, Merkel leads her opponent 63 to 29 percent--among those who bothered to respond.So it looks like the upcoming contest will be a snoozer: a wide majority for the Chancellor, but low-turnout and no broad mandate. Which is a shame: because if no one votes, nothing is really decided.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 bond insurance coming back? One of the more prominent casualties of the financial crisis the bond insurance industry. Before 2007--for a modest fee--issuers could have a third party evaluate their credit and underwrite their bonds. By virtue of low default and high recovery rates among the insured, insurers' capital could transform otherwise marginal credits into AAA bonds. 70% of munis are held by individuals, so it seemed like a perfect business. Investors would buy the bonds; the insurers would do the analysis. But the insurers tried to expand, and the model that worked so well with munis blew up with mortgages. They were all downgraded, and then no one cared about bond insurance. Some insured bonds actually traded at higher yields than uninsured counterparts--for the same credit! But it looks like people are beginning to care again. Detroit's 18 billion-dollar bankruptcy has gotten investors' attention. While the city and other bond issuers--Yankee Stadium parking lot bonds come to mind--may suspend payment of principal and interest, insured bonds keep right on paying. The insurer is on the hook, and unless there's a haircut, they'll eventually get paid back. It's one more way the financial markets are showing signs of healing. It's just ironic that for the marketplace to get better, a big borrower has to get sick. 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

Why is economic growth so hard to predict? When you look at an economics textbook, it looks so clear: supply and demand each have their functions, and the two lines meet somewhere on a price/quantity graph. Economists call this the equilibrium condition. It's like physics--an object at rest tends to remain at rest, right? Only it doesn't. Prices and quantities are always changing, and nothing seems to be at rest. In classical physics, cause and effect are clear: you have a past, a present, and a future that proceeds in one direction. But in economics, you're modeling decisions made by thinking producers and consumers. Their expectation about the future can combine with their memories of the past to create a different set of behaviors in the present. The past, present, and future don't run in a straight line--it's more like a set of interlocking rings and feedback loops For example, expectations of higher interest rates today are leading many to lock in mortgage refinancing rates. Thus, while refinancing is significantly less financially attractive than it was three months ago, many banks are seeing their refi activity hold up. That can't continue. Finance and economics are complicated because people act on their best judgment. When all those expectations line up in one direction, watch out: something's gonna change. 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

Are markets just random?It's easy to think so. One day they're up 100 points, then they're down 200, then up 400. What comes next? The market appears to move to its own inaudible beat, uncertain as to time, place, and level. When the economy is good is often a bad time to invest, and when the economy is bad appears to be a good time to invest. What to do?All living systems--biological, sociological, economic--are immersed in a sea of randomness. The most basic biochemical processes depend on the random thermal motion of the proteins, enzymes, and DNA. The mechanism of evolution depends on random mutations. Life progresses because of the balance between rigid, formal structures and flexible, adaptive processes.Economies and markets do the same thing: they balance the stability of what's familiar with the innovation of something new. But they aren't perfectly random; they have a decidedly upward bias over the long run. That's because  knowledge (and capital) accumulate over time. We're more significantly more productive now than we were 50 years ago because we work smarter than we did then.Still, short-term wiggles and jiggles can upset even the most patient investor. We just have to be sure that we don't get fooled by randomness into doing something stupid.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

Violence is escalating in Egypt. What does it mean? Hundreds are dead and thousands are injured in the latest round of fighting. Muhammad Morsi has been deposed by the military, and protests by his followers have been violently suppressed. Western countries are trying to balance realpolitik with human rights. Do they rebuke the military leaders and cut off aid, or do they engage with the regime and risk losing standing with the rest of the world?A winner in this no-win situation is Ayman al-Zawahiri, formerly lieutenant to Osama bin Laden and now al-Quaeda's leader. A year and a half ago he voiced his disgust at his former colleagues in the Muslim Brotherhood for what he called their treasonous acceptance of the rules of the West. When the military fired on Brotherhood protesters, he must have felt vindicated.But Egypt is a pluralistic society, with secular, Christian, and Muslim citizens. Their economy exports oil and cotton, and attracts tourists from around the world. The military is the most powerful economic actor, controlling hotels, gas stations, and even noodle factories. Real democracy in such a society consists of checks and balances between functional state institutions. They're a long way from that.Revolutions are good at tearing down; they're not so good at building up. The road to democracy is long and hard. Let's hope their civil strife doesn't turn into civil war.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 is capital? Strictly speaking, capital is the stuff that businesses use to make money. Factories have machinery and robots to fabricate their goods; builders have tools and trucks to construct with; service organizations invest in people and processes to provide legal or financial or personal services. Capital is what makes an economy grow, and access to capital--physical or intellectual--is what allows people and nations to become wealthy.So it's encouraging when we see analysts call for a capital spending boom. During the recession spending on capital goods--the physical kind--collapsed, as all spending did. Since the economy bottomed, real capital expenditures have grown 20%, while the average for the past six recoveries has been 30%.So there's a lot of potential for improvement. Now it's true, the weakest areas of capital spending are for structures--natural, due to the bubble-fed overbuilding--and for IT equipment--which may be due to technological improvements. But if spending on research and development and industrial picks up, that could have a multiplier effect on the economy, as capital improves productivity which improves earnings which allows for more capital spending.It's another way the global economy is poised to accelerate. During a downturn, demand may be deferred, but it won't be denied.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 Facebook everywhere?Every day, over 120 million Americans check their Facebook pages. Of those, around 100 million do it on a smart-phone. That's a lot of friending, liking, and posting. And it's a lot of data that Facebook is collecting. Because when you "like" something--just touching the button--you're telling Facebook's marketers that they might be able to sell you something.Facebook now offers customization on a massive scale. It's like TV, but with ads that know whether you're a parent with young children, or a daily coffee drinker who hasn't gotten your daily caffeine fix yet. In any case, those annoying ads might just be useful, especially when the offer you coupons to the store right across the street.And it's now a global phenomenon, with 700 million daily users globally in June. In the UK, the statistics are similar to the US: 40% of the population accesses the service every day; 80% on mobile devices. This kind of use allows advertisers to come up with creative campaigns to drive results.So say goodbye to AT&T-like ads that tells us to "Reach out and touch someone." Whatever we like is now going to reach out to us.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 Europe coming out of its funk? For the past year and a half, the Euro-zone has been in recession. It started in late 2011, as the financial turmoil of the prior two years came home to roost. Banking sector problems, government austerity, and currency turmoil led the area's decline. Unemployment has stabilized after rising significantly. Exports to the US, UK, and China are picking up, and industrial production--a leading economic indicator--is rising. There's still a pretty strong north-south split in the, though. In Germany unemployment is 6.8%; in Denmark its 4.3%, while in Spain, Italy, Ireland and France it's above 10%, and in Greece--which has been in recession for five years--unemployment is 26%. But financial markets have been pretty calm for the past year, even as Italy's elections led to a deadlocked government, Portugal's government faltered, and tiny Cyprus needed a banking-sector bailout. Yields on Spanish and Italian bonds are still lower than they were a year ago. Still, the consensus of most economists is just for modest growth. The US probably grew at a 1.7% rate in the second quarter of this year; the Euro-zone is likely to just eke out a positive number. While it's better to grow, it isn't time to break out the champagne yet. 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

Why do investors listen to economists?The short answer is, it improves their opinion of meteorologists. The long answer is, the market depends on earnings, earnings depend on revenues, and revenues depend on the economy. So, a strong economy should lead to strong earnings and a strong equity market, and vice-versa.Except when it doesn't. Good economic news can become bad market news when filtered through the Federal Reserve. A stronger economy means higher interest rates which means a higher discount rate applied to stock dividends, and lower stock prices. Finance trumps economics. Or a weaker economy leads to cheap financing and aggressive CEOs who seek to grow through acquisition--leading to a stronger market. Investment trumps finance.The investment business is a multi-dimensional chess game in which the economy operates on one of the more important planes--but only one. The others include finance, investor psychology, diversification, animal spirits, tax policies, the Fed, and others. Prediction is a dangerous endeavor.There's a story about Admiral Halsey during World War II: his weather forecaster told him that Pacific storm patterns were impossible to predict. He famously replied, "Forecasts may be useless, but I still need them for planning."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

Where is Dell going?In the ‘90s Dell was the darling of the PC revolution. By taking orders over the phone and sourcing parts in bulk, Michael Dell was able to provide custom-built desktop computers at cheaper prices than the off-the-shelf competition. The company expanded rapidly, as more and more everyday processes became automated. The development of the internet turbocharged this movement.But Dell’s approach didn’t work well with laptops, much less tablets. Now Dell’s model seems a quaint artifact of another age. His push into servers seems reminiscent of Sun’s dominance there. That didn’t work out so well.Still, the company has generated loads of cash over the years, which they have efficiently destroyed by buying their own stock back and watching the price go down. Now the founder says he wants to take the company in a new direction, but where? I confess myself bewildered over these fights over decimals. The real question isn’t whether 13.6 or 13.8 dollars a share is fair, but whether Dell can even survive as a going concern.Computing has changed. Mobil platforms are being supplanted by an internet of things. If Dell doesn’t want to be sold for scrap, they’d better do something new.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

Do big buildings predict a bust?That’s the idea behind the Skyscraper Index, which posits that when a country build’s the world’s tallest building, an economic crisis isn’t far away. Some people are worried that the building of Sky City in China predicts an upcoming economic and market collapse.The first example of this idea comes from the beginning of the 20th century, with the Singer Building in New York, a 612-foot structure, whose completion came close on the heels of the Panic of ’07. The Chrysler and Empire State buildings were finished in 1930, just after the Crash of ’29. The World Trade Center and Sears Tower were built in 1973—right around the time of the Arab oil embargo. And so it goes, with the Petronas Towers in Malaysia andKhalifa Tower in Dubai.It’s true that skyscrapers tend to be built at the tail-end of economic booms, as expensive land and cheap credit make concentrated office space economically attractive. Architectural and nationalistic hubris may also play a role. But the index has failed to predict many downturns—the post World War 1 recession, the early-‘80s recession, Japan’s crash—and several tallest buildings haven’t presaged a bust. The Taipei Financial Center is one.A growing economy generates a need for tall buildings. Sometimes those buildings will be the tallest. When that growth slows, the building stops. There’s nothing magical about it.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 Detroit turn around? As city officials, unions, creditors, and their lawyers meet to figure out what to do with Detroit’s $18 billion in liabilities—an astounding $25 thousand per person—it’s worth asking what can be done to change things. What can the city do to reverse decades of suburbanization and de-gentrification that has resulted in a central city that’s simply too small for its contracted obligations? It’s tempting to say that the situation is hopeless: that a decaying city-center simply can’t compete with greener suburbs, warmer weather in the south and west, and the nationwide decline in manufacturing. But we’ve been here before. In 1975 New York City faced bankruptcy and initially failed to get any Federal support. In 1978 Clevelanddefaulted on its Federal loans. In these and other cases, financial distress followed decades of ruinous trends. But then things got better. What changed? Problems get attention, and management attention is the scarcest resource of all. When leaders focus, things can improve. Cities that turn around build up their financial, civic, and intellectual capital. Lower land prices help, but they aren’t enough. Reversing a city’s decline is possible, but it doesn’t happen by itself. Fasten your seat belt, Detroit. It’s going to get a little bumpy. 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

Does automation have a cost?A recent op-ed in the Wall Street Journal asked, “Daddy, what’s a truck driver?” The article cited advancements in computer software and processing power to posit a future where truck drivers would be curiosities of the past, akin to rotary phones and CB radios. It describes a remote mine in Australia today, where six automated heavy-duty mining trucks sporting engines with 2600 horsepower and 25 million lines of software code run 24/7 using advanced guidance systems and monitored by personnel in a control room miles away.This kind of innovation has been going on for decades. Farms need far fewer people today to grow corn, wheat, and other products than they needed 20 or 30 years ago. Bioengineered crops and GPS-equipped tractors have made the industry much more productive. Relative food prices have fallen dramatically. The result is an economy where the natural trend of most prices is downwards, with a few exceptions: labor-intensive industries where consumption is aided by widely-available credit, such as higher education. But there’s no free lunch: over-indebted college graduates who can’t find work are now moving back in with their parents and defaulting on their student loans. Who pays for this?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

It wasn’t supposed to be this way.In 2008 Lehman failed, in part because the company was massively leveraged. They had borrowed over 30 times their net equity. When the real estate market tanked, investors were worried that Lehman would owe more than their assets were worth, and rushed to get their cash out. This “run-on-the-bank” led to Lehman’s failure—a major link in the Financial Crisis which caused our Great Recession.So regulators focused on the leverage ratio—how many assets a bank has compared with how much equity—as a simple way to analyze risk: the more levered, the more risky. Banks deemed systemically important—too big to fail—have to be less levered than the around-the-corner community bank. This will keep our financial system safe--or so the thinking goes.But now we see that many big banks are “gaming” the rules by selling safe, liquid assets to make room for more risky loans. In order to make their leverage ratios look safer, they’re actually making their balance sheets more risky. Because their liquid investments and cash reserves serve as a buffer in case a liquidity crisis—another “run on the bank”—emerges again.For every complex problem there is a solution that’s clear, simple, and wrong. That’s one reason why financial regulation needs to be so complex. 

Can women save the Tour de France? The race covers 2000 miles and takes 23 days, winding along country roads, through city streets, and up tortuous mountain passes. The rider with the lowest aggregate time is the overall winner, although there are team prizes as well. But the world’s premier cycling event is reeling. Between 1995 and 2010 only one winner wasn’t linked to doping, which is affecting its popularity. Thirty years ago Tour organizers included a parallel women’s Tour, using the same finish lines, but the event was cancelled after five years. Women’s sports have come a long way since the ‘80s, however. Many female athletic events attract a larger male than female audience. And doping scandals are rare among women. Other endurance sports, like marathon or triathlon, have women’s divisions at the elite level. The hope here is that stars will emerge that can bring in additional viewers—as has happened in tennis and golf. With all the scandals, the sport needs help. It wouldn’t be the first time women have ridden to the rescue. 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