Charter Trust - Global Market Update

The Paradox of Voting  - Why do people bother to vote?It’s a fair question. After all, the chances of one vote affecting a national election are infinitesimally small. Some years, in a small, swing-state like New Hampshire, those chances inflate from infinitesimally to microscopically small. But still, any rational observer would have to conclude that Election Day is a exercise in the triumph of the irrational—a sort of mass-delusion in which we willingly deceive ourselves into believing that We Can Make a Difference.Because we also know that if it came down to a dozen votes or so, the recounts and the lawsuits and appeals would be so numerous that if we could harness the hot air generated we could heat our homes with it this winter. Some subset of judicial officials somewhere remote from us would make the final call. And we would have to sit passively like football fans frustrated at the officials, enraged but impotent.Some say that it’s the linking of a national ballot with local issues that brings us to the ballot box. After all, it often is the case where local issues get decided by a vote or two. I’ve personally been involved in two such initiatives in the past decade. But turnout is always higher for national elections, so that can’t be the case. Or it may be that people vote in order to feel good about themselves—a sort of “voting as consumption good.” If so, then why do we complain about long lines and poor organization? If voting were like exercise, then overcoming obstacles should make us feel better—like doing a hard workout.No, I think that voting is one of those public goods that people willingly donate—like picking up litter on a mountain trail that you never expect to hike again. We do it because we know that it does make our country a better place. And if we don’t like the outcome, we can always buy one of those bumper stickers that proudly proclaims, “Don’t blame me: I voted for the other guy.” We retain the right to complain.Douglas R. Tengdin, CFA Chief Investment OfficerFollow me on Twitter @tengdin

The MOOC Revolution  -  What's a MOOC? A MOOC is a Massive Open Online Course. There are hundreds of them available, from Archeology to Biostatistics to Zoology. Twenty or thirty elite institutions offer them now, from MIT to Johns Hopkins to UC Berkeley. They’re free of charge, and if you have Internet access you can study just about anything. It's one more example of how Information Technology is revolutionizing our world. And the revolution can't come too soon. A four-year residential undergraduate degree costs about $100 thousand per year. (Never mind that the price is a lot lower than this for most families--that's the cost, whether it's partially covered by government subsidies, alumni donations or an endowment.) With some 20 million college students in the US, we simply cannot afford as a society to devote $2 trillion, or 7% of the economy, to this iconic ideal. MOOCs allow us the flexibility necessary to equip future workers with the skills they need without the administrative overhead, residential expenses, and non-educational extras that drive up college costs. Offering classes online has its challenges: test security, academic integrity, and other issues. But an institution could offer advanced placement tests to admittees that have MOOC certificates, which could cut the time required to earn a degree in half. And they could "invert" the classroom, assigning lectures as homework and using class time for projects and tutorials, reducing costs even further. At this point MOOC providers Coursera and EdX are free for participants, with some institutions charging a nominal fee for a certificate of course completion. The platform's developers are working to get the product right before trying to monetize it. It a lot of ways, it's like the early days of Facebook. But unlike Facebook, no one would say that you're wasting your time when you log on. Douglas R. Tengdin, CFA Chief Investment Officer Follow me on Twitter @tengdin

Bring Back the Muppets!  -  Use the Force, George.When Disney announced they were buying Star Wars from George Lukas, my first thought was, good, now we’ll know what happens. Back in 1980, after the success of the original film—and before any further films had been released—Lucas revealed that he originally had nine films in mind: a central trilogy, a prequel trilogy, and a successor trilogy—in effect, a nine-part saga. Some 20 people had seen all the plot summaries, with 10-page outlines of each. But they weren’t talking.Once the original series was successful, Lukas said he had put that book on the shelf, and wasn’t sure if he’d ever pick it up again. Making movies is hard work, and these three had taken a big toll on him. But eventually he came back to the project, first with enhanced versions of Episodes IV through VI, and then with Episodes I through III.But the final story was still a mystery, until now. Lukas may have aged, but institutions don’t tire so easily. There’s a great demand for fiction and fantasy that both provides an escape and also presents issues of right and wrong, corruption and redemption. That’s at the heart of many enduring stories.So it makes sense that someone would want to use Lucas’s alternative universe to present additional stories. Whether that will include an aging Luke Skywalker and Han Solo is an open question. After all, there are thousands of characters from the original series to explore—along with kickin’ special effects. Which brings me to my “new hope.” What I loved about the original trilogy was the fun: Princess Leia calling Chewbacca a “walking carpet,” a flying C3PO amazing unblinking ewoks. And Luke’s growth from restless farm-boy staring at the twin Tatooine suns to mature, self-sacrificing  leader (“I will not fight you, Father”) has universal appeal. But technological special-effects wizardry can distract us from character development and significant questions.So I say: bring back the Muppets—low-tech aids that are fun and advance the plot, but don’t get in the way of the central questions. And please: no Jar-Jar.Douglas R. Tengdin, CFA Chief Investment OfficerFollow me on Twitter @tengdin

One Year Later …  Remember MF Global?A year ago, in a flurry of transfers, security sales, and overdrafts, the brokerage firm MF Global filed for bankruptcy. When the firm collapsed, they left a $1.6 billion hole—funds that were owed to customers, $360 million of which are still missing. While the bankruptcy trustee thinks he may be able to make customers whole, that money will have to come from other creditors. Over the past year, no organization has been sued, no cash has been clawed back, and no one has been held formally responsible. Former CEO Jon Corzine has requested that a civil suit against him by shareholders be dismissed.A congressional oversight committee has been investigating the failure for the past year and has conducted three hearings, 50 interviews, and has reviewed hundreds of thousands of documents. But one factor that hasn’t come up for much public discussion is the role of the auditor, Pricewaterhouse Coopers.PwC is one of the Big Four auditing firms. They work with Goldman Sachs, JP Morgan, and other large financial firms. They should have known that MF Global’s policies and procedures were sloppy and disorganized. PwC should have known that money would go missing when customer withdrawals created mayhem. PwC had been inside MF Global from the beginning: they were Man Financial Group’s auditor when the Canadian firm bought the brokerage business from fraud-ridden Refco in 2005. They were the financial counsel that helped Man spin off MF Global in 2007. And they knew all about internal controls: they helped set up Refco’s. That didn’t work out so well.Financial firms fail, sometimes due to fraud, sometimes from bad timing. The internal auditor is supposed to find trouble spots and flag them for remedial action before they blow up. Except when they don’t. Douglas R. Tengdin, CFA Chief Investment OfficerFollow me on Twitter @tengdin

Small Futures? - Is small business the future?Both of the major presidential candidates are on the stump extolling the virtues of small business. And it’s true that small businesses create the majority of new jobs in our economy. But actually, it’s young businesses that create jobs. Small businesses that have been small for the past 5 years tend to create jobs at the same rate as big businesses.it’s also true that, over time, small-cap companies outperform large-cap companies. They have better sales growth, better ROE, and better stock market returns. Part of this is due to their higher volatility—small businesses are just riskier. They have less capital and their managers have less experience. But part of this is due to the fact that it’s easier, just as a matter of math, for small businesses to grow.So when I hear politicians say they want to favor small businesses, I think they’re missing the point. To borrow from General George S. Patton, no small business ever succeeded by staying small; it succeeds by growing to become big. There are already too many set-asides and special perks in the tax code. Another special provision for small businesses just makes for more paperwork.And it increases taxes on the margin. Because as they grow, at some point those small companies will no longer qualify for those special provisions—they have to be phased out. And that phase-out effectively raises the marginal tax rate on companies who are growing. So something designed as a support becomes a disincentive to grow.It’s no great shame to be small. Of course, it’s no great honor, either.Douglas R. Tengdin, CFA Chief Investment OfficerFollow me on Twitter @tengdin

Storm Busters! - Who ya’ gonna’ call? That’s the question lots of us have about Sandy. Sure, we can go to Weather.com or Ready.gov to get storm information, but once the power goes out, it’s not so easy to stream videos or post pictures on Facebook. And with most folks getting their TV via cable or satellite, local news stories are pretty hard to find, too. That leaves us with that old standby, the transistor radio. Surprisingly, none of the government’s websites lists local radio stations or emergency phone numbers. The closest you can get to a phone listing on the FEMA website are instructions on how to get their monthly preparedness tips via text message. That’s a help. And while we’re on the subject of phones, remember landlines? It used to be that the phone lines would get jammed during a storm. But now that so few people remain on landlines, those lines are clear. If you can find an old-fashioned phone that hooks directly to the wall-jack, not a cordless job with built in caller-id, messaging, and call-waiting. Those need electricity. As we get increasingly high-tech, it takes some low-tech (or mid-tech) equipment to get us out of a jam: radios, landline phones, cars, and maybe a chain saw. And an old-fashioned list of important numbers: police, fire, the power company, and the local Department of Public Works. New Englanders pride themselves on their resourcefulness and readiness. But when things get dicey, it helps to know who to call. Douglas R. Tengdin, CFA Chief Investment Officer Follow me on Twitter @tengdin

Stormy Weather - How does weather affect the economy?As Hurricane Sandy bears down on the East Coast, it’s worth asking how storms impact the way we live. In years past this was a foolish question. After all, in an agricultural society unusual weather has a direct impact on food production. 1816 was the year without a summer in northern New England. Over a foot of snow fell in early June, and there was a killing frost in mid-August. That winter cattle starved for lack of hay, and people sustained themselves on boiled nettles and porcupines.As we shifted to an industrial economy, people were less dependent on month-to-month changes in the climate. Year-round production was imposed on a summer-winter schedule, but vestiges of our agricultural heritage remain: school schedules that used to accommodate working in the fields; financial stresses that climaxed in the fall because the economy’s cash needs at harvest-time.But as a consumer-economy, the weather still has an effect, particularly on retail sales. Usually an individual storm like Sandy just defers purchase plans—what we don’t buy this week we’ll make up next week. But when storms impact holidays (like Halloween) some of those purchases never happen. Last year’s warm winter meant that winter clothes were never purchased and planned ski vacations were just cancelled.The National Oceanic and Atmospheric Administration sponsored research that indicated that weather events can reduce our economy output by up to $500 billion. Different states have differing levels of vulnerability. New York was seen as the most vulnerable; Tennessee the least.But preparation helps. As we batten down the hatches and prepare for Sandy’s impact, we can be thankful that we’re ready. Because what’s really disruptive isn’t the weather, but the surprise.Douglas R. Tengdin, CFA Chief Investment OfficerFollow me on Twitter @tengdin

(P)Reserving the Fed  -  Is Fed-bashing a new spectator sport?Criticizing the Fed has been a political trope for years. It’s easy to do: find an economic trend, look at the point when it became visible in the data, then disparage the Fed for not picking up on what was, in retrospect, obvious. If you can find a couple of financial columnists or academics who mentioned the emerging problem at the time, so much the better: then it looks like the Fed was ignoring what was obvious to “everyone,” even if “everyone” was just a couple of obscure cranks.There is a legitimate public policy debate regarding the Fed and central banking: what’s the best way to regulate the banking system; what’s the best way to set interest rates; how should we manage the money supply. These are good questions, and it’s reasonable to examine history and the practices of other countries to try to find the best possible system.And then there’s carping: grumble about something you have no prospect of fixing. Current critics of the Fed remind me of the scene in Monty Python’s “Life of Brian” where a rebel group meets to complain about their rulers: “Apart from better sanitation and medicine and education and irrigation and public health and roads and a freshwater system and baths and public order,” John Cleese asks, “What have the Romans ever done for us.”I feel that way about the Fed: apart from price stability, a sound banking system, solid US credit, international currency stability, economic research, educational resources and a growing money supply, all without political or financial scandal, what has the Fed ever done for us? And to those who would replace it—what evidence can you show that your replacement would work better?Douglas R. Tengdin, CFA Chief Investment Officer Follow me on Twitter @tengdin

Grading the Fed  -  Remember the Fed?The Federal Reserve just held a two-day meeting of its open market committee and decided to change almost nothing. Their formal statement contained about half a dozen word changes. Their policy remains as it was: add to the money supply, keep rates at zero, and monitor the economy. It’s been that way for the past four years or so. Yawn.Time was when we waited on the Fed’s pronouncements with bated breath. Fed-watchers would gauge the size of the Chairman’s briefcase to divine whether he would advocate higher or lower rates. Now it comes as a surprise that the Fed is meeting. The response is often, “Really? So close to the election?” or “Why do they even bother? What do they have to decide?”But the Fed has a continuing role to play in this recovery. The banks they oversee talk about the three-C’s of credit: Cashflow, Capital, and Character. Those are the principal factors banks use to evaluate a company’s ability and willingness to pay back its loans.Well, the Fed can be judged on a three-C framework too. Only these C’s aren’t measuring whether they’ll pay back a loan, but whether they’ll keep money flowing through the economy. The Fed’s three-C’s are: Communications, Commitment, and Credibility. Communications are how they manage expectations—forecasts, statements, and press briefings. Commitment is their willingness and ability to keep policies in place. And credibility is their true stock-in-trade: the assurance that they will do what they say.The three-C’s of credit are a good way to evaluate how risky a loan might be. The three-C’s of central banking give us a tool to tell how trustworthy the Fed is as well.Douglas R. Tengdin, CFA Chief Investment OfficerFollow me on Twitter @tengdin

Fiscal Cliffhanger  -  Is the Fiscal Cliff the Y2K of 2012? Remember Y2K? Interminable meetings discussing scenario tests, date resets on our desktops, and getting new checks printed, all because some punch-card designers decided to save two digits in the date field on an 80 character punch card 70 years ago! But after the zero-hour came and went, and we didn’t lose power, we didn’t lose our phones, and our bank balances were still there, everyone pretty much stopped worrying. Equities at 30x earnings? No problem! Look at all that cash we have in the economy! The Fed put it there to make sure we didn’t have a banking crisis caused by a massive system failure over the turn of the millennium, but then when they mopped that up with higher interest rates, that caused the recession that popped the internet bubble. We’re still recovering from that one. The Fiscal Cliff of today looks like Y2K of 13 years ago. Everyone frets about it; some have discounted it; many are planning for it. But it’s not the known unknown like the Cliff that kill your portfolio, it’s the after-effects. And valuations. The bond market today is reminiscent of the equity market of 1999. Yields just keep going lower, just as equity prices kept rising back then. There are all sorts of rational explanations why bond yields have fallen and they can’t get up--the “New Normal,” global wage deflation (from Chinese labor), natural gas surpluses--just like there were reasonable justifications for the ebullient equity valuations of 1999. Those rationalizations didn’t hold water. In the end, the market couldn’t sustain equity market multiples that were twice their historic average. And long-term bond yields probably won’t remain at less than half of their normal level, either. Douglas R. Tengdin, CFA Chief Investment Officer Follow me on Twitter @tengdin

Golden Futures - What function does gold serve in the economy?For more than three millennia, gold has served as both a unit of exchange and a store of value in the global economy. The stock of gold is relatively stable. There are about 155 thousand tons of gold in the world, and each year the world’s mines supply some 2600 additional tons of the metal. It’s chemically stable, and surprisingly malleable. It has sometimes been referred to as a currency without a country.But the growth in supply has varied over time. In the 17th century, gold from the New World flooded Spain’s economy, causing rampant inflation—one of the underlying factors that led Spain to attack England via the Spanish Armada. In the late 19th century, the gold supply couldn’t keep up with rapid productivity growth in the US, leading to significant deflation and social disruption. William Jennings Bryan’s famous “Cross of Gold” speech was a protest against the gold standard.As a result, many people have a deep seated conviction that gold is a useless, barbarous relic of a bygone era with no yield and a volatile price. Others feel that it is a hedge against inflation, since the supply of gold cannot be manipulated. Certainly as the Fed monetized the deficit and inflation grew during the ‘70s the price of gold grew eight-fold. But inflation has been remarkably low over the past 5 years, even as gold prices have risen again.So is gold money? Money serves three purposes: a unit of exchange, a unit of account, and a store of value. Gold has served the latter purpose since the late-‘90s, but cannot serve the first without government sanction, and it’s never been an accounting standard—that’s always been Dollars or Deutschmarks or Pounds.Unless inflation reemerges in the global economy, gold is unlikely to regain its early prominence. Were it to reemerge as a currency standard, Congress (or the Fed) would have to set the amount backing a dollar—something they could change. And growth in the supply of gold would once again become a concern.So unless inflation accelerates and prices begin to rise dramatically, it’s hard to see how gold adds economic value to a portfolio. The price of gold is a curious thing, but over the long run it’s more of a curiosity than a serious consideration.Douglas R. Tengdin, CFA Chief Investment OfficerFollow me on Twitter @tengdin

Hunger Games - Are we running out of food? This seems like a silly question today, but it wasn’t so foolish 30 years ago. Food prices had doubled in the early ‘70s, and many economists thought we were running into the “Limits to Growth,” a doomsday scenario where global scarcity and resource constraints would force the world’s economy into an economic scenario labeled, “overshoot and collapse.” The solution, according to some, was voluntary simplicity, living simply so that others might simply live. I live in a college town, and I still see bumper stickers proclaiming that “Two is company, six billion is a crowd.” But as the world population closes in on 7 billion, with still no indication of mass famine, starvation, revolution, or Armageddon, it’s worth asking what went right. How did we dodge the limits? The short answer is productivity. Automation of farming techniques and green revolution crops in food staples like rice, wheat, and corn have allowed prices to fall by 75% over the past 100 years, even as population has grown over four times. Moving from muscle power to the machine age has allowed farmers to produce more with less, and some of the most productive cropland in the world is in the most industrialized areas. If real prices are falling, we can’t be running out of food. Moreover, the source of this productivity growth has changed from a higher use of inputs, like machinery, irrigation, and fertilizer, to new techniques, like contour plowing and innovative crop rotation. Many of these innovations have yet to be implemented in places like Africa and Central Asia. Even advanced developing regions like Latin America and China are only as productive as a 1960s Iowa farmer. There’s still a lot of low-hanging productivity fruit. As the world’s major health issue shifts from famine to obesity, it’s clear that cheap and abundant food is a feature of the modern economy. We may have other issues—income distribution, labor underutilization, and so on—but impending widespread famine won’t be on the list any time soon. Douglas R. Tengdin, CFA Chief Investment Officer Follow me on Twitter @tengdin

That ‘70s Show - Remember gas lines?In the late 1970s, government involvement in energy markets reached a new high. They didn’t want consumers to pay excessive prices for gasoline at the pump, so they controlled what the oil companies could charge. No problem, said the markets. Instead of charging consumers more money, it charged them more time. If you’re too young to recall this episode in market mismanagement, just google the phrase “gas line 1970s image” and you’ll get an idea of what I’m talking about.By keeping prices artificially low, the government created a shortage—too much demand and not enough supply. It’s an old saw in economics that you can control the price of something or the supply of something, but not both. Well, a similar thing is happening now in the credit markets. By buying up half of the mortgage-backed securities produced every month plus promising to keep short-term rates at zero forever, the Fed has created a bond shortage.Investors who need to buy fixed income securities are lining up to pay premium prices for corporate and structured products. Remember CLOs: Collateralized Loan Obligations—the bizarre deals for sophisticated investors only with 23 pages of risk factors in their marketing materials that helped blow up a couple of German banks (it’s always the Germans) that Fabulous Fab and John Paulson and Magnetar used to make billions? A few months ago it took months for Wall Street to sell one of these fiendish concoctions. Now they fly off the shelves in hours.This is what the Fed wants. As they put risk-free assets into their balance sheet storehouse, the market reduces the cost of capital for risk-taking enterprises. Those businesses are supposed to hire and spend on new projects to spur the economy back into recovery mode. Unless they don’t.What looked like a windfall for oil companies didn’t end well in the ‘70s, as overpriced oil created a glut in the ‘80s—with a collapse in prices—and the entire State of Texas was seemingly hollowed out by the early ‘90s. Booms and busts inevitably follow price manipulation. It’s hard to tell where the bond shortage will end this time, but as markets get increasing euphoric, it’s not a bad idea to be a little bit cautious.Douglas R. Tengdin, CFA Chief Investment OfficerFollow me on Twitter @tengdin

Sacked in the Citi - What happened at Citigroup?Yesterday, with little fanfare, CEO Vikram Pandit stepped down, effective immediately. Along with Pandit, Chief Operating Officer John Havens also resigned. No explanation was given. Markets were shocked. Although a successor was named—a longtime Saloman Brothers and Citi veteran—you don’t just up and leave a multi-trillion dollar institution unless you’re in handcuffs. Analysts have described it as the worst management transition they’ve ever seen.Pandit has been CEO for the past five years, a time when the bank almost folded. Citi received a $45 billion capital injection from Treasury via the TARP program, and paid that back, along with a $12 billion profit for the US Government. But its finances are still shaky. Their capital plan—which included a reinstated dividend for shareholders—was rejected in April. And just recently former FDIC Chairwoman Sheila Bair slammed Pandit in her memoir of the financial crisis as a former hedge-fund manager who really didn’t understand banking. In a Bloomberg interview Tuesday she could barely disguise her glee at his sudden departure.At its heart, the Pandit’s problems began when Michael O’Neill succeeded Richard Parsons as Chairman of Citigroup’s Board this spring. O’Neill had been a senior executive in several large banks, including the troubled Bank of Hawaii, where he presided over significant asset sales and branch closures, boosting shareholder returns. O’Neill’s “shrink-to-succeed” plan may be what the Board wanted for Citi, and Pandit simply wasn’t delivering the goods.Transitions are tricky. Pandit was by many accounts prickly. He publicly challenged JP Morgan CEO Jaime Diamond in 2008 during the conference call when Diamond announced their acquisition of Bear Stearns. When Citi changed Board Chairs, Pandit needed to make sure he was in synch with the Board’s vision for Citi’s future. Apparently he didn’t do this.Boards are taking charge more often today, firing the managers at Best Buy and Hewlette Packard for personal foibles. But this is the first time a strategic difference has led to such a sudden CEO departure. Ultimately, Board responsibility is a good thing. But we’ll have to see how it works out this time.Douglas R. Tengdin, CFA Chief Investment OfficerFollow me on Twitter @tengdin

Coaching Success  -  What makes for a good manager? It’s an important question. Because when you invest, ultimately you’re trusting management with your money. Whether you’re investing in stocks, bonds, or real estate, how effective the boss is can determine what kind of return you get. When I look back, my best bosses were less concerned with command-and-control and more into mentoring; less leading by telling and more leading by showing. Top managers weren’t commanders so much as they were coaches. And what makes a good coach can make a good supervisor. And what makes a good coach? Three things: they lead, they’re proficient, and they care. Leadership is job one. A leader gets people to follow, if only out of curiosity. Leaders identify problems and run towards them, in a disciplined way. A great coach knows what the problems are and has a plan to address them. They’re proficient. Coaches need to know the game—where it’s been, and where it’s going. When Billy Bean looked at baseball a decade ago, he saw that a new kind of statistical analysis turn a losing franchise around. Top coaches know the necessary skills and they’re not afraid to impart those skills to those under their direction. And they care. Great coaches care personally for their athletes. Yes, the team’s performance is paramount, but a team is made up of individuals, each with his or her own goals and concerns. Great coaches can tell when something’s up, because they’re totally committed to see these individuals succeed, both as athletes and as people. Growing up I was privileged to have a great coach. His leadership, proficiency, and care made me a better athlete and a better person. His team became a world-class organization because of him. Great managers can also accomplish great things. Douglas R. Tengdin, CFA Chief Investment Officer Follow me on Twitter @tengdin