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June 2008
From the Desk of Richard Esposito
Mid-year Investment Summary
Happy 4th of July!
This month we bring you a special reflection, an investment update and a special commentary on a disturbing trend in retirement planning. With the stock market looking ugly lately, we focus on the facts rather than the emotions. The news isn't all bad – yet. The same may not be true for the retirement planning of a growing segment of the American population. But first, some special 4th of July thoughts.
We're right between the anniversary of D-day (June 6th) and Independence Day (July 4th). D-day signaled freedom from Nazi tyranny for millions of Europeans. July 4th marks the day our country freed itself from British tyranny. But while war can preserve freedom, it can't guarantee freedom.
I was reminded of this during our vacation in Maine last week when I read of the death of Linwood Rideout. He was 90. I suspect you, like me, didn't know him. He lived his whole life in Southeast Maine both before and after he served in the Navy during WWII.
He was skipper of a landing craft during the Normandy landings. History records that the Normandy landings of June 6, 1944 involved 153,000 allied troops against 70,000 German troops. It sounds like overwhelming odds in favor of the Allies until you read this eyewitness account of that extraordinary day by war correspondent Ernie Pyle:
Ashore, facing us, were more enemy troops than we had in our assault waves. The advantages were all theirs, the disadvantages all ours. The Germans were dug into positions that they had been working on for months, although these were not yet all complete. A one-hundred-foot bluff a couple of hundred yards back from the beach had great concrete gun emplacements built right into the hilltop. These opened to the sides instead of to the front, thus making it very hard for naval fire from the sea to reach them. They could shoot parallel with the beach and cover every foot of it for miles with artillery fire.
Then they had hidden machine-gun nests on the forward slopes, with crossfire taking in every inch of the beach. These nests were connected by networks of trenches, so that the German gunners could move about without exposing themselves.
Throughout the length of the beach, running zigzag a couple of hundred yards back from the shoreline, was an immense V-shaped ditch fifteen feet deep. Nothing could cross it, not even men on foot, until fills had been made. And in other places at the far end of the beach, where the ground is flatter, they had great concrete walls. These were blasted by our naval gunfire or by explosives set by hand after we got ashore.
Our only exits from the beach were several swales or valleys, each about one hundred yards wide. The Germans made the most of these funnel-like traps, sowing them with buried mines. They contained, also, barbed-wire entanglements with mines attached, hidden ditches, and machine guns firing from the slopes.
This is what was on the shore. But our men had to go through a maze nearly as deadly as this before they even got ashore. Underwater obstacles were terrific. The Germans had whole fields of evil devices under the water to catch our boats. Even now, several days after the landing, we have cleared only channels through them and cannot yet approach the whole length of the beach with our ships. Even now some ship or boat hits one of these mines every day and is knocked out of commission.
The Germans had masses of those great six-pronged spiders, made of railroad iron and standing shoulder-high, just beneath the surface of the water for our landing craft to run into. They also had huge logs buried in the sand, pointing upward and outward, their tops just below the water. Attached to these logs were mines.
In addition to these obstacles they had floating mines offshore, land mines buried in the sand of the beach, and more mines in checkerboard rows in the tall grass beyond the sand. And the enemy had four men on shore for every three men we had approaching the shore.
And yet we got on.
Linwood Rideout was one of those who faced the odds on June 6th and lived. Here he is on his LCT-539 landing craft:
His crew hailed from eight different states. Here they are:
(You can see more photos at: http://www.navsource.org/archives/10/18/180539.htm)
The record shows they came under heavy fire, but delivered their cargo safely. Rideout won the Silver Star. You get that for "gallantry in action."
Naval Officer Rideout returned home to continue life as plain old Linwood with his wife Miriam, whom he had married in 1940. In 1954, they adopted a son Mark. He lived a full, though ordinary, life, ultimately becoming a beloved local legend, working, hunting and fishing in and around Merrymeeting Bay in Maine. After Miriam predeceased him in 1991, their adopted son Mark carried on the family name with three children, one of whom produced three grandchildren.
To all appearances, Linwood Rideout not only helped preserve freedom for his family, but lived the sort of responsible life that keeps freedom alive. That's how freedom really perseveres. This is just common sense, isn't it? The men of D-day didn't put their lives on the line just so we could all do whatever the heck we please. On his recent trip to our country, Pope Benedict spoke eloquently about the real meaning of freedom:
Freedom is not only a gift, but also a summons to personal responsibility. Americans know this from experience — almost every town in this country has its monuments honoring those who sacrificed their lives in defense of freedom, both at home and abroad. The preservation of freedom calls for the cultivation of virtue, self-discipline, sacrifice for the common good, and a sense of responsibility towards the less fortunate. It also demands the courage to engage in civic life and to bring one's deepest beliefs and values to reasoned public debate….in a word, freedom is ever new. It is a challenge held out to each generation, and it must constantly be won over for the cause of good.
...a democracy without values can lose its very soul.(These words) echo the conviction of President Washington, expressed in his Farewell Address, that religion and morality represent "indispensable supports" of political prosperity.
You don't have to be Catholic to understand and appreciate these words. They cut right to the heart of the idea of "freedom." We can't rely on the men of D-day or the men and women in Iraq and Afghanistan to preserve our freedom. Freedom begins and ends with our willingness to sacrifice, live virtuously and take responsibility not only for our own actions, but also for the less fortunate among us.
Our Founding Fathers would agree, don't you think?
Happy 4th of July!
Rick
P.S. After finishing this letter, I came across a beautiful video that connects those brave men and women of the past with those of us who enjoy freedom today. I urge you to take a few minutes to check it out: http://www.grayeagles.org/video.htm
Mid-year Investment Summary:
Worst June Since the Great Depression
The Dow is down 9.4% in June, making this the worst June performance since 1930, a Great Depression year when the Dow's loss in June was 18%. And last week, the Wall Street Journal called this a bear market. Who can blame them? The news seems bad on all fronts: Americans defaulting on their mortgages in record numbers; the housing industry skidding ever lower; banks a mess (and who really know exactly how messy?); and now the stock market sinks to new lows for the year. But before we all run for the hills, let's take a deep breath.
That's better. It may sound like a bit of a stretch to say there may be a ray of sunshine in this darkening sky. But when emotions run hot, we always find it best to take a step back and look at the "big picture." Let's give it a whirl.
We find the big picture by looking at the long-term stock market trend. When we do that, we find some facts about this stock market that you don't hear much about. It has to do with a concept known as "non-confirmation." This won't, we hope, be too complicated, so just stay with us.
We all saw the market turn down towards the end of 2007. The Dow Industrials and the Dow Transports (two major indices we follow) hit lows in January. Then in March, as the world's financial system was rocked by the collapse of Bear Stearns, the Industrials hit another low. If all you looked at was the Dow Industrials, you might have wondered how low it might go. But you would have missed the critical fact that the Transports did not likewise hit a low. They did not confirm the low of the Industrials.
What does it mean? A non-confirmation can signal danger. But, keeping an open mind, it may also be telling us something else is going on. Not only did the Transports not confirm the low of the Industrials, they have headed relentlessly higher since January, recently setting an all-time record. Lots of manufactured goods are being transported around the world (that's what the Transports indicate); lots of stuff is being hauled across our country by trucks and trains.
The argument is bolstered by what is known as the "50% Principle." (It was discovered by a fellow named George Shaeffer who used it to great advantage during the Bull Market of 1949 – 1966.) It's been a pretty good indicator of the direction of long-term (and only long-term) trends. If you've never heard of this, don't fret. Most people haven't.
The 50% Principle notes the following: From the 2002 Dow low of 7,286.53 to the 2007 Dow high of 14,164.53, the Dow advanced 6,878 points. The 50% or halfway level of that advance is 10,725 (the chart below shows the 50% level at the blue horizontal line). If the Dow had turned down more during its recent decline and violated the 10,725 level, we might have considered that a primary bear market was in progress. But the Dow halted its decline on March 10 at 11,971, far above the 10,725 level. Under the 50% Principle, the primary bull market remained intact -- the bull market was still in force.
Even though the Dow just last week broke to new lows for the year, closing at 11,346 on Friday, it still remains above the 50% line. And the Transports have still not confirmed. That's the evidence.
Now, we're not saying that 2008 looks to be a banner year for the stock market. In fact, near-term, caution is the rule. But we'll be watching the Industrials and Transports carefully the rest of the year. If neither averages hit new lows, we may be in store for some pretty dramatic upside action. In fact, if the Industrials hit yet another low between now and the end of the year, and the Transports again do not confirm, we may consider that a buying spot to make some money in stocks.
To make the picture a bit fuzzier, the Transports have started to swoon a bit. We wait. Evidence over emotion.
Interestingly, if all this plays out on the positive side, we may be looking at the last, or third, phase of the greatest bull market in history – one that began in 1980 and has yet to see its peak. A rather shocking thought at the moment, but clearly within the realm of the possible.
Of course, if things go the other way, we will adjust our view accordingly.
Bloomberg Article Brings Disturbing News About 401k's
We have always urged our clients to approach their 401k's and IRA's in a strategic rather than a "knee-jerk" manner. What we mean by "knee-jerk" is the generally accepted "principle" that you should always, always, always put as much as you can into your 401k and IRA. The reason put forth is that you get a tax deduction and the growth of the money is tax-deferred. Who can argue with that?
But we recently came across this disturbing news from Bloomberg:
June 6 - Boston Globe (Ross Kerber): "Record numbers of Americans are raiding their retirement savings as the economy has soured, threatening their long-term financial security to make their mortgage payments, pay medical bills, and cope with rising food and fuel costs. Three decades ago, individually controlled retirement plans like 401(k)s barely existed. Most Americans counted on a pension, with funds contributed and managed by their employer, to provide for retirement along with Social Security payments. But today, workers have accumulated $3 trillion in 401(k) accounts - up from $1.6 trillion in 2002 - making them a tempting target for households looking to get through tough times. The three largest administrators of 401(k)s - Fidelity Investments, CitiStreet, and Vanguard Group Inc. - report a growing number of early withdrawals from the plans in the past year as saving for retirement has taken a backseat to mortgage payments, medical bills, and rising food and fuel costs."
The article implies that people are withdrawing money from their retirement accounts because of a tough economy. But we wonder. Could it be that many of these folks drank the 401k "Kool-aid" and shoved as much money as they could into these "tax-advantaged" accounts? Could it be that they should have set aside some emergency funds to address the sort of contingencies that life inevitably throws at us? You would be surprised at how many people we meet who have skipped this little, but critically important step.
Early withdrawals generate a 10% penalty tax in addition to the regular income tax applied to any IRA withdrawal. This can offset any possible tax advantage you may have gained in the first place.
We were surprised, though not shocked, by the Bloomberg article. The subject deserves more time than we have in this month's letter, but we're going to talk more in coming letters about the problems with 401k's that hardly anyone talks about.
For now, the takeaway is that without a strategy designed for your specific circumstances, you are subject to the push and pull of all that general "advice" you read and hear about. If you don't have a well-thought-out financial plan, perhaps it's time to do something about it.
If you'd like more information about retirement planning, you can contact me directly at:
resposito@lighthousefinancialadvice.com
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