Heather Gudac

Gudac states, “I am proud to join the firm as a partner and look forward to contributing to our high-level client service model as our company continues to grow. I am excited to share ownership in a company that is built on a strong foundation, with an emphasis on team work and service.”

Heather began her career with the firm as a financial planning intern in late 2006.  This transitioned into a full-time position as Operations Specialist and Office Manager in 2008, and was followed by promotion to Operations Manager in 2011.  Heather is a graduate of North Carolina State University, with a BS in Business Management.

“Heather’s talent and skill have been a great asset to FSI.  She has been integral in not only keeping our company operating smoothly, but also advancing our processes so we can continue to improve services and manage our growth.  We’re delighted to welcome her as a shareholder and officer of the company,” says Financial Symmetry founder Bill Ramsay, CFP®.

In addition to her responsibilities of overseeing the daily operations of the firm, Heather assists with portfolio administration and growth management, and manages a growing operations team.  Working closely with FSI’s advisors, Heather coordinates new account transitions, supervises account maintenance and guides our clients though qualified account rollovers and distributions processes.

As everyone is aware, housing was ground zero for the Great Recession.  One of the effects of falling prices was to discourage residential construction.  As we pointed out in last year’s post, we expect construction to eventually return to trend to keep up with new household formation, which would be somewhere, around 1.2 to 1.5 million units per year.  We believe this pace of construction will also lead to much lower unemployment.  Here is our chart from last year’s post.

The latest data shows that permits are climbing and while we don’t know if it will be a steady climb back, we believe that the longer it takes to get back to trend, the stronger residential construction will be.  Here is a chart with the latest data on permits.  Interestingly, it looks like last year’s chart is right on target- we’re at 800,000 permits, and the unemployment rate has dropped to under 8%.

As for government employment, as we pointed out with this post, government has been shrinking the last three years which has been a drag on employment and economic growth.

Now that tax revenues have stabilized and started to recover, we are beginning to see stabilization in government employment as can be seen on this chart.

Simply getting to no net government job losses would be a positive for the economy, and since our population will continue to grow, we will need more firemen, police officers, teachers, etc. so we expect government employment will eventually be growing again.

US politics are still a significant risk, as some politicians may recreate the debt default threat like in 2011, or allow very contractionary tax hikes and spending cuts to take effect at the start of 2013. Both parties have good reasons to compromise, but that doesn’t mean they are certain to.

Neither of these wildcards changes our longer term outlook for the US economy, which we believe will improve once residential construction is again building at a sufficient pace to keep up with population growth as we discussed in last year’s post here .  We are in fact seeing what could be the beginning of a return to those levels as discussed here.

Car sales and production continue to do well as we expected from last year’s post here.  US auto makers are running their plants at a very high level as discussed in this story.

We should also be approaching the point at which local and state governments’ tax revenues are stabilizing and starting to improve, which should lead to the end of large scale government layoffs which have added quite a bit to the unemployment rolls over the last couple of years.  If they merely stop cutting jobs, it will actually be a boost to GDP growth.

These themes are why we remain optimistic about the five year outlook for the US economy.  The wildcards may create a recession and stock market sell off in the short term, so we have gotten a little more defensive, but we are also mindful that the longer term outlook is good so if we do get a sell off, we will use that opportunity to buy stocks with funds from sales we made earlier this year.

Keep an eye out, as we’ll be posting more detailed analysis soon on the two wildcard themes, Europe and US Politics.

Of course not everything that is sold as exclusive is lacking in value.  Viewing the Super Bowl from the first row on the fifty yard line is undoubtedly a fantastic experience, at least for most football fans.  And a long stretch of beach with few others in sight is more enjoyable to some than being one of thousands at Myrtle Beach on July 4th.

The most extreme recent example of exclusivity psychology being used in an abusive way is Bernie Madoff.  His fraud will likely go down in history as the largest fraud that preyed mainly on the wealthy.

He and his accomplices (both the ones in the know as well as the naïve), cultivated a brand that was built on exclusivity.  Potential investors who dared to ask questions about how he was generating high risk-free returns, were told to take their money elsewhere.

Of course the tragedy is that he was not generating high risk free returns. He was merely a thief and a cheat.

Hedge funds are marketed as investments available to the wealthy.  They develop messages that seem to tell wealthy investors that unlike common investors, they can achieve superior investment returns with little or no risk.

The track record however is certainly less than convincing.  In 2011, the HFRX Global Hedge Fund Index* which is “…designed to be representative of the overall composition of the hedge fund universe.…”, lost 8.87%.  And this was after less than stellar returns of 5.19% in 2010, and 13.40% in 2009.  The annualized three year return was only 2.8%.

At Financial Symmetry, we have always balked at the very high fees that hedge funds charge.  And we also do not believe that you can achieve good long term returns without experiencing some periods with losses.

By implementing a well designed investment strategy, there are opportunities presented during a period of falling stock prices that will enhance returns over a full market cycle.

Our composite return**, which includes all of our clients, also had a loss in 2011. However it was only 2.32%.  And that followed a return of 11.05% in 2010, and 23.79% in 2009.  Our three year annualized return was 10.32%, or 7.5% per year more than the average hedge fund investor.

When it comes to investing, there are times when being part of an exclusive group can provide superior results.  One example is when a quality small cap fund closes to new investors before the fund becomes too large to successfully maneuver.

Then there are circumstances where fundamental design, combined with high costs, add up to an almost insurmountable hurdle.  Hedge funds, in their present form, seem to have this problem.

* Source www.hedgefundresearch.com
** Please contact us if you’d like more details on Financial Symmetry’s composite performance results.

One of the ways you can check to see how a charity is spending their money is to look them up online using Charity Navigator.  While the caller was on the line I went to Charity Navigator to look them up.

I could not find them and was told by the caller that they don’t submit information for rating since it costs money and since Woman 2 Woman is a non-profit they try to save money where they can.

I then went to the Woman 2 Woman website and found their audited financial statement for 2009-2010.  Turns out that in 2010 they had revenue of nearly $6.5 million, and that they spent $6.2 million on fundraising!  After an additional $60,000 in Management and General expenses, they spent only $201,000 for their stated mission.

That means if I had donated $100 to them in 2010, they would have only used three dollars to help breast cancer patients.  Needless to say they will not be receiving any donations from me.

If you get a call from a charity, do some homework and you can make sure that your money will get used for the purpose you care about.

Changing Health Care Costs?

As we pointed out in out our post on the cost of health care, getting healthcare costs under control is by far the number one thing we need to do for the long term fiscal health of our nation.

The Cleveland Clinic is bucking the ever increasing cost trend with some inspired strategies.  As their director of wellness put it “We want to make it easy for you to do healthy things and hard for you to do unhealthy things”.

Read about what they’re doing here.

Click to see data charts

When it comes to investment markets, determining “The Fairest of them All” depends not just on where you are investing, but also on the initial conditions.

We’re going to look at two different time periods to get a sense of the attractiveness of three primary investment areas – Cash, Bonds and Stocks.

For cash we use the three month treasury bill yield.  For bonds we use the ten year treasury bond yield.  And for stocks we use the earnings yield on the S&P 500.  The earnings yield is the reported earnings per share as a percent of the price per share.

The 2000s

First is the beginning of 2000, and the starting yields.

• Cash     5.5%
• Bonds    6.5%
• Stocks   3.5%

Over the next ten years, the annualized returns were

• Cash      2.71%
• Bonds     6.38%
• Stocks  -0.95%

Notice that for bonds, the return for the ten year period was just about the same as the starting yield.  This makes sense since we measured the return of ten year bonds over ten years.

For cash, the return being lower than the starting yield was a reflection of falling interest rates over the ten years.

For stocks, despite the fact that reported earnings are now about 70% higher, the return was negative.  This is because the very low earnings yield was indicating that stock prices were significantly overpriced.

The 1990s

The second time period we’ll look at is the ten year period starting in 1990.  The starting yields were:

• Cash     7.8%
• Bonds    7.9%
• Stocks   6.5%

Over the next ten years, the annualized returns were

• Cash       4.85%
• Bonds     7.70%
• Stocks   18.21%

Once again, the return on ten year bonds was almost identical to the starting yield, while cash earned less than the starting yield due to falling interest rates.

Now let’s take a look at current starting yields (see graph below).

• Cash      0.0%
• Bonds    2.0%
• Stocks   6.7%

What does it all mean?

So the current valuations are the mirror image of what we saw at the beginning of 2000.  And while we don’t know exactly what returns will look like over the next ten years, the initial conditions mean the odds are that stocks will provide the highest return of the three.

We do not think stocks are likely to earn over 18% a year like the 1990’s as we are not expecting stocks to reach a point as overvalued as they were in 1999.

Our guess is that bonds will have the worst returns given that we wouldn’t expect returns to be higher than the starting yield of 2%.  We do however expect cash to average more than the current 0% as we expect interest rates will rise at some point this coming decade.

We also need to understand how much stronger housing may get.  The graph below shows the number of housing permits issued each year since 1959.  The Linear trendline shows the gradual rise over time, which is reflective of the growth in the number of households in the country.  Since our population continues to grow, we can say with a high degree of certainty that the future trendline is likely to be close to its current level, which is about 1.4 million new units per year.

While we clearly overbuilt from 1996 to 2007, we have also been significantly underbuilding since 2008. At our current pace of only about 600 thousand new units, we can then feel quite confident that the longer we continue to underbuild, the more we will have to build in the future.

This second graph represents housing permits in red (left scale), overlaid with the unemployment rate in blue (right scale inverted).  As one would expect, residential construction has a significant relationship to employment.

Based on this relationship, we believe that when residential construction gets back to the level needed to keep up with our growing population, we will have unemployment under 6%.  We cannot say with certainty when we will see this construction recovery, but it is very unlikely to be more than four years from now and will probably be more like two years from now.

And this coming resurgence in construction is not just about houses for purchase, as the data above includes apartments.

This is a good look at some major components of the US economy over the last 16 years.  There are a few insights that are particularly meaningful in understanding why overall job growth has continued to be disappointing.

Two of the areas show strength since the bottom of the recession in 2009: Exports and Business Equipment Investment.

We often hear the belief that the US doesn’t make anything, much less make things that the rest of the world wants. But we can see from the black exports line that exports have grown over the last 15 years.  We can also see that since the bottom of the recession in 2009, exports have recovered.  So this is an area of the economy which is doing surprisingly well.

The blue line shows that companies have been investing as business equipment investment has recovered well from the low point in 2009. However businesses won’t invest significantly more until the overall economy is stronger since businesses invest and hire when they have more customers.

Two of the areas are not helping with the recovery: Government Purchases and Residential Construction.

The green line for government purchases relative to the economy shows that such purchases have been declining for the last 15 years.  While this was not a negative when the other areas were strong- like from 2003 to 2005, and from 1995 to 2000, this was because the other three areas were strong.  With the most recent decline, it occurred while only two of the other areas were increasing.

The biggest reason we have high unemployment is clear from the red line- Residential Construction.  If this area had started recovering as government purchases started falling this year, then we likely would not be in our current slowdown.

Fortunately, there are good reasons to be optimistic about construction getting back on track. We believe this will be what ultimately brings unemployment down to reasonable levels.  Basically we are currently under-building residential units.  We explore the reality in this post.

Below is a chart showing a composite of all of our clients’ returns starting in March of 2002 (Point A).  Six months later (Point B), account values were an average of almost 13% lower.  Jumping ahead to Point C we can see that despite the short term loss from A to B, returns averaged a 6.6% annualized return. This was good compared to the more conservative alternatives of cash which only earned 2% (three month Treasury bills), and bonds which only earned 5.8% (Barclays US Aggregate Bond Index).

Returns from Point B were better, averaging 8.8% to the end of 2010.  Of course if we had a perfect crystal ball, we would have sold all stock holdings earlier in 2002 and bought back at the very bottom in late 2002 (and sold everything at the peak in 2007 and bought back at the bottom in 2009, and then sold everything in early 2010, and so forth…however no one knows everything, especially about the future).

There are a couple of important lessons from this example.

First, you should have enough funds in cash and bonds to cover withdrawals you’ll need to make in the next few years, so that you will not be forced to sell stock positions if prices are low.  We use our risk capacity measurement to set appropriate allocations for cash and bonds based on expected withdrawals.

Second, returns from lower prices are higher, so use lower prices as opportunities to buy.