Charter Trust - Global Market Update

Is it this easy to become a billionaire?The 5-year old ride-sharing company Uber just received funding that valued the firm at $17 billion. Really? How can a taxi-company that didn’t exist when current kindergartners were born be worth more than Avis and Hertz combined?Anyone who’s ever rented a car knows how annoying it is. The lines, the prices, the endless special fees. And standing on a street corner with your arm raised trying to hail a cab and seeing endless off-duty signs feels like a scene from Kafka.Transportation is an inefficient market. Uber uses smart-phones to link riders and drivers together. It’s reported that the company had over $200 million in revenues last year, and that sales double every six months. With a 20% margin, that valuation would be 13 times projected 2016 earnings.But that’s the rub. A lot can go wrong between now and 2016. Competitors like Lyft can force down margins. Cities could restrict the service. Taxicab and rental car companies will try to tie them up in litigation. But unlike web companies like Facebook or Twitter, Uber is offering a real service, not just some online experience.This is what progress feels like. It’s messy and disruptive. If Uber is successful, a lot of cab drivers will have to find other work, just like folks who used to build typewriters. One thing is sure: in 2016 you’ll have a lot more ways to get to the airport.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

So how do you decide?When a news event occurs, is it a new signal, or is it just noise? The European Central Bank cut the rate they pay banks for their reserves  to negative 0.1% -- is it signal or noise? The National Association of Purchasing Managers issued a report yesterday, then corrected it twice, indicating that US manufacturing is still expanding – was that signal or noise?It’s tempting to label all these interim economic reports financial static. And a lot of them are. So much data comes at us from so many directions that it’s hard to decide what we should care about. Consider inflation: two government agencies report three different indices, each of which has dozens of sub-groups. Or employment: it’s measured two different ways, and each indicator has both leading and lagging elements. If you look too closely, you could drown in all the disclosures!If you’re involved in the markets, your attention should be determined by your perspective. If you have a long time-horizon—saving for retirement while in your ‘20s or ‘30s, or establishing a young child’s college fund—you should perhaps keep an eye on broad trends, but that’s all. Regular saving through all the ups and downs will probably be your best approach.Similarly, if you’re drawing regularly from your nest-egg and most of your assets are committed to short-term bonds, the market’s squiggles and jiggles also shouldn’t affect you much. But when you’re in the middle—still saving, but getting closer to needing the funds—then the news will have more impact. A change in the economy’s direction might call for a change in your tactical allocation. Still, even then, looking at the trends and averages of major indicators makes more sense than trying to watch every release.In the end, whether a report is signal or noise depends on your perspective. One investor’s warning sign is another’s annoying distraction. But even the Federal Reserve—our most economically sensitive agency—only reviews policy every other month. That’s more than enough for most investors.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

We’ve talked about cutting down on noise. But how about boosting the signal?The past few days we’ve discussed the signal-to-noise ratio as a way to understand why we get so distracted. It’s the ratio of meaningful information to irrelevant data. It’s the ability to hear a radio-station’s programming above the static background.And there’s a lot of noise in our lives—diversions that make it hard to hear what’s important. So one way to enhance the ratio is to reduce the noise, by having a quiet space or using un-networked computers. But the other way to improve things is to amplify the signal.You can do this with a time-budget; you can do this with a checklist, to identify your priorities—listing your P1s, 2s, and 3s. Some weeks there’s only one P1 on the list. And you can boost your signal with a schedule, where you plan your work to make sure the P1s get done.If we don’t focus our energies, we’ll drown in clatter and clutter. The main thing in life is to keep the main thing the main thing. Listing out priorities and planning our time is a good way to make this happenDouglas 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

How do we stay focused? We live in a distracting world. Email, cable news, Facebook, Twitter—they all cry out for attention. And it doesn’t help that our phones and tablets and computers beep and chirp and vibrate flash at us with every new input. Since companies like Google and Facebook make their living off of ads, they find ever more innovative ways to get ever more relevant advertising right in front of us, right where we can’t ignore it.But investing is a long-term process. The magic of compound interest doesn’t work overnight. It takes years—decades, really—of patient saving and investing for the average investor to build something significant. We need to concentrate on long-term returns even when short-term demands are literally in our faces.One approach is to build a distraction-free space in your life. One investor has a “library” where he retreats to read, write, and think. No electronic devices are allowed. Other people use headphones with light music or white noise to block out interruptions. Some even downgrade their computers in order to unplug. Whatever the specifics, you can improve your signal-to-noise ratio by reducing the noise.Blaise Pascal said that all our miseries derive from not being able to sit in a quiet room alone. Cutting out clutter is a good way to concentrate on what’s important.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

How do you tell what’s really happening?When the newsreels stop rolling and the microphones go away, you’re often left with the impression that a circus parade just rolled by. Did anything actually change, or did we just see a cavalcade of horses, camels, and elephants roll down Main Street?When a major news event happens, one thing that does change is our perception of the news. Those perceptions meld together into expectations, and those expectations get built into stock and bond prices. It doesn’t happen perfectly and it doesn’t happen all at once, but market prices tend to reflect the general news stream.That’s why everyone was so downcast in the winter of 2009. The major banks had taken major losses, and there were rumors that some of them could be nationalized. The market’s gloom wasn’t purely irrational. It reflected the news-flow at the time. By contrast, the sky-high sentiment we saw at the top of the technology bubble mirrored the stories of increased productivity and growing investment spending.Because feelings tend to feed on themselves in a positive feedback loop, these market booms and busts get overdone. Folks look back at those times and ask themselves, “What were we thinking?”It’s a fair question. Because when everybody thinks alike, somebody isn’t thinking at all.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 college athletes exploited?With the NCAA Basketball tournament reaching the heights of hype and football players from Northwestern University trying to unionize, it’s a reasonable question. After all, the schools make a lot of money off these sports—TV rights, merchandizing, ticket sales—not to mention the cachet that comes from being a national champion. In an era of branding and name-recognition, it pays to be number one.So the question is, should these athletes be paid—or paid more, since they do receive scholarships. First, let’s note that we’re talking about football and basketball. Other sports are money-losers for colleges, no matter how we may personally feel about our alma mater’s ski or swim teams. Those sports are part of the educational process, but there aren’t enough gate-receipts to pay for the equipment, trainers, coaches, and facilities necessary for a top track or soccer program.But football and basketball are big business. And the schools treat them as such, booking tens of billions in revenues. We should note that the professional football and basketball don’t have their own farm systems—they use the NCAA. And the glamour and pressure of a national championship serves a high-visibility try-out for the pros. It did for Michael Jordan and Andrew Luck.But all the cheating scandals, convoluted NCAA rules, and off-the-books booster outrages are indications that the simplest way to value labor—wages—is being suppressed. And the athletes at Northwestern aren’t necessarily looking for cash; they want scholarship-security and health protection if they suffer career-threatening injuries.It’s hard to argue that these athletes don’t deserve better compensation. Without their labor, the schools have no TV-rights to sell to ESPN and CBS. Adam Smith noted 238 years ago that businessmen rarely meet together without contriving some scheme against the public. These workers should tell the schools: no pay, no play.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

How do you achieve your goals?Ed Viesturs didn’t just decide to climb the world’s highest mountains one day and get on a plane for Nepal the next. Scaling these summits took years of preparation. Only a superbly conditioned athlete can climb above 25,000 feet—7,600 meters—without supplemental oxygen. It took time, energy, and lots of planning to reach his goal.It’s like this with many things in life. A runner doesn’t hop from jogging around the block to running a marathon without a clear plan. Surgeons need to undertake decades of preparation before they’re ready to operate. Achievement is like an iceberg: one-fifth execution, four-fifths preparation, under the surface, only visible to those who understand the process.Attaining your financial goals is no different. The most important part of any portfolio is the financial plan that underlies it. It’s not enough to own stocks that double in a year. Anyone can get a two-for-one payout if they buy enough lottery tickets. But getting lucky is not a plan. In the mountains that attitude gets you killed; and investors get poor.Climbing mountains requires planning, patience, and knowing when to advance or retreat. Investors need to take a similar approach. Because sometimes the most important investment is the one you don’t purchase.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

“Getting to the top is optional. Getting down is mandatory” That’s the formula Ed Viesturs developed as he pursued his quest to climb all 14 of the world’s 8,000 meter peaks. When he accomplished this in 2005 he was only the 12th person ever to do so. Since then only 19 others have climbed all 14. On a mountain, Ed describes himself as a risk-manager, continually evaluating whether the conditions or circumstances support the next move.Similarly, risk management is an integral part of investing. Investors can’t control the markets and how the markets will behave. But they can control how exposed they are to the markets—what risks they’re willing to take, and what risks they need to walk away from.If I were to re-state Ed Viesturs’ credo for investing, it would go something like this: “Return on capital is optional; return of capital is mandatory.” This has several significant implications. First, every investing activity involves risk. Even a small bank CD can be tied up for a period of time if the bank experiences financial difficulties and needs to merge with another institution.Second, economic investments should generate cash for their owners. The cash may not immediately come back to the investors, but that is their purpose. So Google, which doesn’t pay a dividend, still generates cash. The managers just believe that the $60 billion per year of operating cash-flow should be reinvested into the business. Eventually, all maturing companies pay a dividend, as Apple started to a couple of years ago.Third, bonds—which pay their investors back according to a pre-determined schedule—are deeply mathematical instruments. As time passes, their profile changes. They get shorter and the risk of non-payment becomes less. There’s less credit risk in a three-year instrument than in a 30-year obligation.Climbing the 8000-ers requires understanding and determination. Reaching your investment goals can also be daunting. But by managing risk investors can improve their odds. 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 like climbing mountains?I thought about this when I looked at the career of Ed Viesturs, the first American to climb all 14 of the world’s 8000-meter peaks—all without supplemental oxygen. He has sometimes been called a risk-taker, but he bridles at that description. He defines himself as more of a risk manager, continually assessing the conditions and deciding whether to go forward to not.Because the air is so thin and conditions are so extreme where these high peaks jut up into the jet stream, high-altitude climbing is extremely dangerous.  Some have calculated that just being part of an expedition gives someone a 1 in 34 chance of being killed. But climbing isn’t like playing roulette. Yes, unlucky events like a random rockfall can be fatal, but there are prudent ways to avoid such un-chancy occurrences.In his quest to summit these peaks—an 18-year odyssey—Viesturs was on 30 expeditions. While climbing, he decided to turn back ten times—four times when he was within 350 vertical feet of the top. His conservative perspective led him to adopt the credo, “Getting to the top is optional, getting down is mandatory.” This approach kept him around to come back another time.If I were to adapt his doctrine for money management, it would be say “Return on capital is optional, return of capital is mandatory.” This has implications for asset management, economic analysis, portfolio rotation, and security selection.Investing, like climbing, involves a combination of luck and skill. By managing risks rather than blindly taking them, we improve our odds and avoid becoming victims of the mountains—or markets.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 dissent predict the future?Sometimes, when you look at a decision, the most interesting part of the debate isn’t where people agree it’s where they disagree. That’s often the case with legal discussions. When the Supreme Court decides a case, they usually publish two opinions: a majority opinion that explains the ruling, and a dissenting opinion that points out holes in the majority’s argument.Dissenting opinions often contain a key to understanding where the future will lead. In his insightful dissent in the 19th-century school segregation case Plessy v. Ferguson, Associate Justice Harlan noted that legal segregation between the races would impose a badge of servitude on African Americans and violated the 13th Amendment. 60 years of civil-rights struggles followed.In the Fed’s decision last week the President of the Minneapolis Fed dissented. The Fed reported that it was because he didn’t like the wording of the official statement—an unusual reason to disagree. But the Fed is unique. It’s not a single government committee, but an aggregation of several constituencies, including regional leaders. President Kocherlakota explained his dissenting vote on the Minneapolis Fed’s website.In his note he makes it clear that the Fed is concerned about the falling inflation rate. PCE inflation is currently running around 1%--the core is even lower than that. If deflationary expectations take hold, this would have a deeply corrosive effect on the economy. Japan’s 25-year struggle with deflation shows just how poisonous it is. And the Fed is aware of the issue. Kocherlakota wanted the market to understand that interest rates will be extremely low as long as inflation remains below its 2% target.So as markets embark on what seems like another “taper-tantrum,” keep in mind: sometimes dissent is decisive. Until inflation increases, don’t expect interest rates to move. 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 the ‘90s we had dot-coms. In the 00’s we had to connect-the-dots. Now the Fed is issuing dot-plots.Buried in the blizzard of information that the Fed released Wednesday was a dot-plot of all of the Fed officials’ predictions. And while Janet Yellen did a fine job in her first press conference reiterating how future Fed actions are data-dependent, market participants were able to compare what the Fed is thinking now versus what they thought three months ago.The dot-plot places a mark where each official projects the Fed Funds rate to be at the end of 2014, 2015, 2016, and in the long-run. And since the Fed is currently removing its extraordinary stimulus—tapering—it’s natural to wonder when they might start returning short-term interest rates to normal. The dot-plot gives us a convenient picture of what the Fed thinks.And what do they think? Most Governors and Presidents think that rates will be at 1% by the end of 2015, and 2% by 2016. Long term expectations are unchanged from December, at 4%. But their short-term projections are about a quarter of a percent higher.While Yellen is correct when she insists that “it depends what conditions are like” as to when the Fed will begin tightening, it’s also true that the dots show a more hawkish Fed than the market expected. So while the Chair may have been trying to sell a more dovish picture, the market wasn’t buying. When she told the press-gathering not to look too closely at the dot-plot, I thought: “The lady doth protest too much.”The Fed has changed its communication strategy from Greenspan’s “creative obfuscation” to its current “blinding transparency.” Fed watching has always been an art. These charts make it a little more of a science.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 does a GPS have to do with the recession?Like many, I use a GPS app on my phone when I drive to a new place. Normally, this is a convenient way to get from A to B—no fussing with maps and obscure directions: “Turn left a half mile after the second railroad crossing where the 7/11 used to be, I think they replaced it with a Benny’s.” But when the GPS malfunctions, or has the wrong map coordinates, it can literally lead me into trouble: one-way roads, missing landmarks, or other difficulties.Part of the problem is when we rely on a tool, some of our other skills get rusty. With the GPS, the effect has been significant. It’s hard to find detailed maps any more. And I’m not as familiar with the landscape as I used to be, since I now have that endless road scrolling in front of me on my smartphone.What does this have to do with the mortgage crisis? Banks developed a new risk-management tool in the ‘90s: Value at Risk (VaR). It used financial theory and empirical inputs to measure the how risky a bank’s portfolio might be. The tool was fine. But some of the inputs were wrong—or even backwards. Experience told the risk managers that housing  values don’t fall nationwide. Oops. Also, their volatility measures were about half of what they should be.As a result, when things got dicey, senior management seemed out-of-touch. They had come to rely on a tool that told them that their risk was only a fraction of what it actually turned out to be. Incidentally, a similar thing happened with the London Whale trade. Bad VaR inputs led to terrible trading results.The problem isn’t the tool, it’s data input. In the early days of computing we had a phrase for this: garbage in, garbage out.

“The fox knows many things, but the hedgehog knows one big thing.”The Greek lyric poet Archilocus coined this phrase almost 3000 years ago. Its original context has been lost, but as a principle, it can describe two approaches to life. On the one hand, you have people who pursue many ends—often unrelated and contradictory—eclectic, diffused, omnivorous. On the other are souls who pursue a singular, unitary vision, an all-embracing organizing principle that gives the world coherence.We see this in many walks of life. In literature, Dante was a hedgehog, Shakespeare a fox. In philosophy, Plato was a hedgehog, his pupil Aristotle a fox. In American history, George Washington was a hedgehog, Jefferson a fox. And in modern life, great business leaders are hedgehogs—think of Steve Jobs with his focus on design and functionality—while great investors are foxes: Warren Buffett, Peter Lynch, John Templeton.Both approaches are needed. In business, a firm needs a singular vision to cut through the clutter and keep the main thing the main thing. It’s too easy to get distracted by the crisis of the day and never spend time or energy on what’s important. Hedgehogs get things done.But with investing, foxes rule. A portfolio needs to be diversified, limiting its exposure to any single area--reducing risk—while spreading its assets among an array of industries that generate new products and ideas—improving return. Investors need to be fox-like and flexible.Foxes and hedgehogs both have their place. Indeed, they often marry each other. Which are you?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 ratings agencies fatally conflicted?During the financial crisis the credit-rating agencies came under heavy fire for giving AAA ratings to subprime conduits that later experienced losses. Calpers and other investors filed lawsuits, alleging that the agencies knew, or should have known, that the bonds they rated were junk.The ratings agencies are supposed to tell investors how creditworthy a borrower is. The three largest agencies—Moody’s, S&P, and Fitch—control 90% of the market. They operate under an issuer-pays approach: the issuer engages one or more agencies; the agency conducts its due diligence and publishes a rating; and investors use this rating to help them evaluate the bonds. Ratings are publically available, free of charge, to all investors. The ratings provide a standardized reference point for portfolio managers.There’s a conflict: borrowers pay the agencies to have the agencies tell the world what they think of the borrower. But the alternatives—user pays, or public funding—have their own problems: agency costs, or lack of visibility. Unless you subscribe to Morningstar, you don’t know their ratings. They don’t put out press releases. And internal ratings, which professional money-managers like Charter use, aren’t much good for public policy purposes..The ratings agencies are the guardians of the credit market. But who will guard the guardians? 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 stocks in a bubble? A strong stock market, low interest rates, and confidence in the ability of innovative companies to generate sales are heating up the market for initial public offerings. Especially tech stocks. When I read about IPOs for Candy Crush, the addictive mobile app, or Godaddy, the web-site registration firm best known for its edgy Super Bowl ads, I start to wonder. There were 25 tech IPOs in the fourth quarter of 2013, compared with 8 in the fourth quarter of 2012. Many investors remember the heady days of 1998 and ‘99, when someone with an idea and not much more would go public. Back then it was anything dot-com related; now it’s cloud-based technology that’s in the spotlight—cloud-based payrolls, cloud-based call-centers; cloud-based trade-management. Is it different this time? Back then, the average listing firm had been in existence only 4.5 years; now they’ve been around 13 years before they go public. At that time they often went public to raise primary capital; now they list so they can offer stock options to lure engineering staff. And there were 457 IPOs in 1999—more than twice as many as last year. The witches in Macbeth chanted: “Double, double, toil and trouble, fire burn and cauldron bubble” as they brewed up their potion of disaster. Let’s hope the market isn’t brewing of a cauldron of trouble for investors now.   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