ELF
Capital Management, LLC
(Endowment
Like Fund Management)
September
9, 2009
This is the ELF Capital Management,
LLC Market Letter for the month ended August 2009. If you do not wish to be included in our
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Reflections on Summer: Indulgence, iPhones and Income Taxes
In the
How was
your summer? What did you do with
it? Did you learn anything new? Was it fraught with challenges or blessed
with successes?
For many
working adults, summer is a time when we seek an opportunity to take a
much-needed break from work to improve our mental health. While there are many more benefits garnered
from taking a summer vacation, after watching the economy take a nose-dive, I’d
bet that taking time from our worries was the number one reason this year.
The year started
with markets continuing a dramatic fall to levels not seen in more than ten
years before finding its bottom in early March.
Many who were considering early retirement watched their 401k retirement
plans accounts become halved and contended with having to reconsider a change
in plans. By spring, the markets had
rebounded sharply and continued higher over the summer. There are some who missed the rally. For those who didn’t miss it, it is wonderful
when one can find solace in a sea of worry.
Not that I believe all investors have a lot to worry about these days; I
don’t. However, we’ve just come through
the worst economic climate in over seven decades and many have endured immense
stress in the process. Did you take a
vacation this summer?
For my
household, going away on a vacation was an iffy proposition this year. Not only did I see my retirement plan account
greatly diminished, my business endured swiftly falling revenues as well. It was frightening to say the least. Then in March, when the market began its
rally, we experienced a significant influx of new business that has already
brought us above prior years’ to better than average earnings. Nevertheless, the experience left me very
unsettled about whether I should be cautious or optimistic going forward. But, vacation we did and found ourselves
savoring the experience more than ever before.
Setting the Stage
Our family
tends to vacation around the same time each year – mid July. This seems to work out best when managing
around the schedules of school aged children and the cyclicality of my
business. And, for as long as I can
remember, we journey off to the beach for fun, sun and relaxation with several
good books.
When we
went away last summer (in July 2008), the stock market was down more than 20%
from the October 2007 highs; oil prices had surged past $140 per barrel pushing
gas prices above $4 per gallon; the US Dollar was dropping against most major
currencies and threatened potential runaway inflation; and the housing and
financial crisis were gaining momentum. With
all that was happening, it was impossible to leave work behind. I took along my computer with dual monitors
and arranged having internet service so that I could manage any needed changes
to my client’s accounts. CNBC was the
only show playing on our television set and I barely ventured far from this “make-shift”
office I set up at the beach. So glued
to following financial news events each day, my family brought me my meals and
informed me about happenings at the beach.
While we had arranged a two-week rental, we wound up leaving a few days
early.
Fast Forward to This Year’s Experience
Having been
fortunate enough to get clients reinvested into the markets by mid-March, there
was far less tension heading off to the beach this year. Yet, there remained enough uncertainty in my
mind about the economy that I was not going without bringing along my computer
workstation set-up. Clearly, this time –
the circumstances were different. Two
weeks before we left, my cellular phone contract came up for renewal and I
retired my BlackBerry and opted for an iPhone.
If getting
my clients monies invested back into the markets in March was the smartest
business decision I made this year, getting an iPhone will have been a close
second. This device not only allowed me
to enjoy my vacation, it has become a valuable business tool to have at my
disposal.
When they
say “they have an app [short for application] for everything”, believe it! Not only did I find “apps” to get the Wall
Street Journal, New York Times and Bloomberg news services, I found apps to
keep me “plugged” into global stock and bond market activity. They even have an “app” that provides
economic statistics from the Federal Reserve Bank’s database. On top of that, it is also GPS enabled and
helped me track weather, find restaurants and even look up and purchase movie
tickets. With this new tool, I had
instant access to the news and markets wherever I was – at the beach, at a
restaurant, where ever I went.
As a
result, I determined very quickly that I didn’t need to set-up my computer
workstation – which drew hearty applause from my family! They were obviously worried about the
prospect that we might repeat the unpleasant vacation experience from the prior
year.
In addition
to the ability to procure my favorite music on this device, I was also able to
obtain audio-books or e-books with great ease.
I’m hooked… It didn’t take me
long to determine that Apple has a real winner with this product. Not only do they have an excellent
smart-phone device, they also have significant potential for follow on
purchases with their iTunes and App store.
In the
spirit of proper disclosure, I do not own Apple stock personally or in any of
my client accounts. But, I certainly
will be following this company going forward.
With far
less stress driving this year’s vacation agenda, I had the opportunity to let
my mind relax and allow my thoughts to wander.
Shouldn’t this be among the more important things to do when on a
vacation? I began to ponder the concept
of how the economic downturn might impact the average person’s income taxes for
the 2009 tax year.
When the Mind is Able to Wander
While it is
widely expected that we will see income tax rates raised to pay for most of the
economic stimulus spending directed by
Following the
worst economic environment in more than seven decades, it might seem intuitive
to think that the average person will pay less in income taxes. However, I believe that the average person
might actually wind up paying more in income taxes this year.
How did I
come to conceive this idea? The answer
lies in the belief that consumers have been frightened into spending less and
saving more. And, the impact of
significant increases in our national savings rate will produce greater income
tax revenues than expected from lower spending and higher unemployment.
Have you
noticed that in the second quarter’s earnings reports, many corporations have
been able to increase profits in the face of decreased revenues? Unless you are pumping savings into a tax
deferred account, like an IRA or 401K, money saved is also money taxed. When a business spends, almost all of those
expenditures are tax deductible; and, while individuals are far more limited in
what they can deduct against their taxes, I’m only guessing that far less is
being spent on tax advantaged expenditures – cash for clunkers and the
first-time home-buyers credits being the exception.
And, what
if the average taxpayer does wind up paying more in taxes this year? Not to worry, the current majority of our
elected officials in
In a well
articulated Barron’s article this past month, University of Kansas Professor
Anderson Chandler argues how “politicians rail against what they describe as
the misplaced interest of investment bankers, CEOs and other corporate
executives” while diverting the same type of scrutiny from themselves. The following passage from his article “The
Capital of Self-Interest” alerts us how, in his words, politicians can be
considered greedy too:
“For example, legislators routinely
increase the tax on cigarettes to reduce smoking, but argue that increasing
minimum wages will not decrease employment among low-wage workers. They ignore
how increasing the minimum wage makes it more difficult for employers to
justify the training costs necessary to make teenagers into useful workers.
Eliminating low-wage job
opportunities prevents lots of kids from gaining valuable job skills. Lawmakers
do not reduce poverty by getting teenagers and other part-time workers fired or
never hired in the first place. Kids need better basic education and training,
but they also need low-wage job opportunities for the experience that will
allow them to earn higher wages. Enlightened economic policy would focus on
ways to help workers earn maximum wages, not minimum wages.
Why is unenlightened minimum-wage
policy popular and invariably supported in Congress and state legislatures and
municipal councils? It isn't credible to argue that presumably well-intentioned
politicians are simply ill-informed and naïve about the link between rising
minimum wages and higher teenage unemployment. They don't need to read
government-provided unemployment statistics to see the problem. Many are old
enough to remember low-wage assistance from carry-out kids at the grocery
store, gas-pump jockeys, and waiters and waitresses in popularly priced
restaurants. So many of those jobs are gone; do they ever wonder why?
The legislative jihad against
minimum wage jobs continues because it is in the self interest of politicians
to kill such jobs. That's how you increase the need for public assistance and
government-sponsored training programs for jobs that don't exist. Politicians
prefer handouts to wages because recipients of handouts are beholden to
political providers. Public dependency grows when the market system is forced
to shrink.”
I don’t
know about you, but I don’t agree with
Market Update
The second
leg of the market rally that began lifting stocks significantly higher in July,
continued its upward climb in August – albeit, at a more modest pace. Now, it would seem that the stock market is
getting way ahead of itself in terms of pricing in a recovery. Market pundits seem to be gathering momentum
around the thought that the market is over-due for a healthy correction. Yet the market hasn’t yet accommodated this
thought.
In August
we continued to see improvement in many economic indicators, but we also continued
to see companies shed workers from their payrolls at a concerning rate. As well, the latest consumer confidence
numbers lacked any meaningful improvement – in fact, they receded a little. On the plus side, the latest purchasing
manager’s survey for both the manufacturing and service sectors came out much
better than expected. Yet, it continues
to be somewhat of a challenge to measure the pace of the recovery.
While,
normally, one can gauge the pace of an economic expansion through stock prices,
stocks have too much going for them to help us measure. There remains considerable cash on the
sidelines receiving little interest in return, much of which represents
investors who have missed the rally from March’s lows. On the other hand, there is also the
possibility that we could have an initially explosive recovery that would make
current stock prices look cheap. While
for fundamental reasons, the market currently looks oversold; behavioral
reasons seem to be keeping more buyers than sellers in the market place.
We continue
to think that the market has gotten ahead of itself and have reacted by taking
some profits and increasing our average cash position to between 35% to
40%. To me, it seems more prudent to do
so. No, I haven’t turned bearish on the
prospects for an economic recovery; I just think that stocks have come too far
too fast and opted towards playing it safe.
At the same time, I am moving towards a repositioning strategy that includes
some international equities back into the mix.
Despite
migrating more heavily into cash during the month, our portfolios lifted higher
at a more modest pace relative to the broad indices reflected below. As such, I am happy to report that our ETF Strategy
performance was UP 2.20% (after management fees) for the month of August. On a year-to-date basis, we continue to look
pretty good as well. Here are some
comparative numbers for you to review:
|
|
Aug 2009 |
3 Month |
Y-T-D |
1 Year |
|
ELF's
ETF Strategy (net) |
2.20% |
12.46% |
25.78% |
-10.12% |
|
S&P
500 |
3.36% |
11.04% |
12.99% |
-20.44% |
|
Russell
2000 |
2.76% |
14.05% |
14.54% |
-22.67% |
|
MSCI
EAFE Index |
5.16% |
13.79% |
21.14% |
-17.69% |
|
|
3.36% |
11.51% |
20.82% |
-18.52% |
For
disclosure purposes, past performance is not necessarily indicative of future
results and ELF Capital Management LLC (ELF), formerly Hoffman White &
Kaelber Financial Services LLC, cannot guarantee the success of its
services. There is a chance that
investments managed by ELF may lose a substantial amount of their initial
value.
ELF is an independent
discretionary investment management firm established in February 2003. ELF manages a strategic allocation of
primarily exchange-traded index funds (ETFs), and may invest in other carefully
selected securities. ELF may also employ
hedging techniques, through the use of short positions and options. ELF manages individual portfolio accounts for
both individual and business clients.
The ELF ETF
Strategy returns presented herein represents a composite of actual results from
all client portfolios managed by ELF.
Currently, it is the only composite presented by ELF and separate client
account portfolio positions are substantially similar, except as may be
modified for retirement plan accounts and accounts with net equity of $60,000
or less. There is no minimum account
size for inclusion into ELF’s ETF Strategy composite and accounts with net
equity of $60,000 or less have a tendency to downwardly skew the combined
results.
ELF’s
performance data presented herein includes the reinvestment of dividends and
capital gains; as well, ELF’s ETF Strategy composite returns are presented
after deducting actual management fees, transaction costs or other expenses, if
any. ELF charges an annual investment
management fee as follows: 1.25% on the first $250,000; 1.00% on the next
$750,000; 0.95% on the next $4,000,000; and, 0.75% thereafter.
Broad market
index information provided is solely for the purpose of comparison. This index data was obtained from third party
sources believed reliable; however, ELF does not guaranty its accuracy. An investment account managed by ELF should
not be construed as an investment in an index or in a program that seeks to
replicate any index. In most cases,
investors choose a market “index” having comparable characteristics to their
portfolio as a benchmark. An ETF is a
security that tracks an index benchmark or components thereof. As ELF actively manages a strategic
allocation of primarily ETFs, selecting a comparable benchmark poses
significant challenges. Over time, the
broad market indices provided above may exhibit more, similar or less
variability of returns and risk than ELF’s strategic allocation. As well, the broad market index information
provided above reflects gross returns and have not been reduced by any estimated
fees or expenses that a person might incur in trying to replicate an index.
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