On September 13th, 2007, the Associated Press reported…

The world’s tallest building, still under construction in the booming Gulf emirate of Dubai, has become the world’s tallest free-standing structure, its developers said on Thursday…The developer announced in July that Burj Dubai, Arabic for “Dubai Tower”, had exceeded Taiwan’s Taipei 101 which is 508 metres tall, to become the tallest building in the world.

When I read about the Burj Dubai, an unsettling feeling came over me. I don’t remember when or where, but at some point in my life I recall being told that economic calamity soon followed the construction of a new “world’s tallest tower”.

I was anxious to determine if there was truly a relationship between the construction of “towers” and market peaks, so I pulled up the ever-so-handy Wikipedia to do a little homework. Wikipedia was enormously helpful because with every building on the list it also listed the buildings that it surpassed and was proceeded by in height. Here is the link to the Empire State Building page. (I figured you could start in the middle and work your way in either direction.)

Let’s take a look at how the stock market performed after the construction of a new “world’s tallest tower”. (I didn’t include communications towers or tourist structures such as the Eiffel Tower, the Tokyo Tower or the CN Tower. Also, I didn’t include the Petronas Twin Towers in Malaysia because only the Antenna was taller than the Sears Tower – not the roof.)

* Annual Returns provided by Crestmont Research, specifically from the Crestmont Stock Market Matrix . Returns are calculated as “Individual Investor Real Returns” which are adjusted for inflation, reinvested dividends, transaction costs and taxes paid.

What I found remarkable was just how well the “Tower” indicator predicted secular bear markets in stocks. I was surprised to discover that not a single building taller than the Empire State Building was built during the nearly 40 years between the two secular bull market peaks in the 20th century. Furthermore, construction on a single “tower” was not initiated for the 31 years between the two most recent secular bull market peaks (1968 and 1999).

But what I found even more astounding was the number of “Towers” built at secular bull market peaks. After 37 years of no “towers” being constructed (1929 – 1966), two “towers”, the World Trade Center Towers and The Sears Tower, were started within a couple years of one another and finished at essentially the same time. After an 18 year span with no “tower” construction, three “towers” were built right at the end of the Roaring 20’s just as the US was entering the Great Depression. Ironic!

Just for kicks, I thought I’d check out if this indicator worked in foreign markets as well. I was curious to know when the tallest tower was built in Japan and what sort of time proximity it had to the Nikkei crash in ’89. Sure enough, the two events coincided. From 1988 – 1991, the Tokyo Metropolitan Government Building (also known as “Tax Tower”) was built in downtown Tokyo and was the tallest structure in Japan until 2006. From 1990 - 1993, the Nikkei lost 60% of its value as Japan fell into a decade and half deflationary accident. Today, the Nikkei is still 60% below its peak of 18 years ago! (The Midtown Tower became Tokyo’s tallest structure in 2006 and consequently, the Nikkei was the only major stock market to depreciate in 2007!)

Whether you accept the Jewish/Christian Bible as Truth or not, it’s hard to ignore the seemingly strong relationship between market peaks and “tower” construction. I haven’t studied the world’s other religions as much as I’d like or should, but I believe that the theme of “pride before a fall” is interwoven throughout all religious texts such as it is in the Christian Bible. Regardless of your religious beliefs (or lack there of), it might be wise to take an objective look at your investment strategy and search for ways to insulate yourself from the possibility that equity prices may fall substantially.

I think I’ve provided a fairly objective view of our capital markets in my Market Outlook. I explain why a lot of financial advisors fail to find ways to protect their clients in secular bear markets which you can read by clicking this link.. For additional ideas on Wealth Management in the current market environment, I might suggest taking a look at my Stagflation Alert. Both have been fairly “spot on” in explaining why the market is behaving as it is.

Wow, what a day for the market. All the major indexes erased yesterday’s losses! It was a “red-letter day” for the Dow achieving it’s best one day advance of 2007.

But from a technical standpoint, the market continued to weaken. Over the past two days, more stocks have declined than advanced. About an equal number of stocks hit new lows today and yesterday then hit new highs even though the markets are only points off their 52-week highs. This suggests that while the “weighted averages” rebounded, more than half of all the stocks traded on our exchanges are still down after two days of relatively volatile action. Furthermore, increasing volatility typically signals a peak or trough in the market.

It’s still too early to tell if the bear market is starting, but today’s action reinforced the recent technical weaknesses in the market.

By proceeding, I acknowledge that I have read and understood the Disclaimer, Performance Reporting Disclosure and Copyright Statements .

The following is an update of a post that I wrote on April 17th, 2007 regarding the probability of a Goldilocks scenario versus Stagflation. I’ll update the data on the last day of each month and repost it. The purpose of this post and subsequent updates is to objectively examine the changes in both economic and inflationary data since the Federal Reserve made the decision to quit raising rates in the Summer of 2006. (Click here to view original post.)

In the month of April, Inflation figures moderated a bit. Specifically, the CRB Index and the PPI came down some but that was after a scorching hot February so they were due for some moderating. Energy prices are still climbing and the price of gas at the pump reached an all-time high a couple of weeks ago at $3.22/gallon (Nationwide average according to AAA.) The market is focused on Year over Year (YOY) figures on PCE, CPI and PPI but these are all skewed down because of the big dip in energy and metals prices last fall. PPI and CPI for the trailing 6 months (since November) are at 4.8% and 2% respectively which would be 9.6% and 4% annualized.

The big news is on the economic front. A mixed bag of improving manufacturing and construction data but a big dip in consumer spending. The other significant development was the much larger than expected dip in existing home sales below 6M annualized units. The average home price for existing sales did move up. This can be attributed to the fact that subprime borrows who would buy cheaper homes are being squeezed out of the market by stricter lending standards. While the consumer curtailed his spending, he still has a pretty optimistic outlook of the future as both Confidence and Sentiment improved.

By proceeding, I acknowledge that I have read and understood the Disclaimer and Copyright Statements .

Possibly, one the most egregious acts of deception made by Wall Street is to downplay the impact of market volatility. Wall Street does an exceptional job of “selling” the investing public on the importance of “staying invested” because it serves their best interest. The only way for Wall Street to make big money off of you is for you to be invested in equities.

Unfortunately, the majority of financial planners discount the impact of volatility when they do financial planning for their clients.

So, what’s the big deal? Well, let’s take a simple look at it. Say, you have a $100,000 account and in year one it earns 20%. Then in year two, it loses 20%. Wall Street would tell you that your average return is 0% – which is accurate, however, the “true return” on your account would be -4% for the period or just above -2% annually.

In order to calculated the difference between what Wall Street promotes as the historic returns in the market and what an investor would have truly realized, I calculated returns for the Dow Jones Index (DJI) from 1920 to 2005. (I calculated this figure by taking the index’s price returns [% change in prices] and added the appropriate dividend yield.)

The annual average return of the Dow Jones Index (DJI) was 11.8% while the true internal rate of return or as I like to say the “true return” of the index was only 9.9% - almost a full 2% less. [The performance figures for the DJI are skewed up. Click here for explanation]. So, how big of a difference does 1.9% make? Assuming that you start with $100,000 and invest it over 30 years, the difference between an 11.8% and 9.9% “true return” would be $1,141,607 ($2,839,580 @ 11.8% vs. $1,167,973 @ 9.9%).

At The MAC, our goal is to participate in bull markets but protect our clients from losses in bear markets. Since it’s near impossible to “get out” right at the top of the market, here’s the critical question that I’d like to answer. Is an investor better off missing all of the bear/down markets if it means missing a fraction of the bull/up markets? To determine the answer I calculated the following scenario. Assuming an investment in the DJI missed all the down years, but only participated in 70% of all the up years, it would have realized a 10.25% true return versus 9.88% true return with a buy-and-hold strategy - almost a full 0.50% improvement. I calculated this by simply assuming a 0% return in down years and multiplied the return in up years by a factor of .7.

For this example, I assumed a 0% return in down years, when, in reality, an account invested in cash would have earned a modest return. Assuming a 3% return in cash during down years, the true return on this scenario jumps to 11.10% – a 1.22% improvement! In conclusion, it is definitely prudent to avoid down years assuming that you still are able to participate in the majority of the up years.

If you would like a MS Excel spreadsheet of my work, simply submit a comment to this blog with your e-mail address, I’ll be more than happy to send it to you.

It’s important to point out that the return for the DJI is skewed up due to the nature of the index and something called survivorship bias. The DJI consists of 30 stocks that theoretically represent the makeup of the entire stock market. Of the original 30 stocks in the index, only one company is still included, which is GE. The vast majority of these companies are either out of business or have been acquired or merged with another company. The index has replaced old failing companies, with new successful companies. Just in the last 5 years, the DJI replaced 4 of the 30 companies in its index.

The S&P 500 index, which includes 500 stocks, does a much better job of eliminating any survivorship bias. This is why the DJI is hitting all time highs, while the S&P is still 7% below its all time high. Studies by Ibbotson and Morningstar put the S&P’s performance for the same period around 10.4%. I was not able to easily obtain the dividend history for the S&P 500 so I had to use the DJI instead. Furthermore, the purpose of this section in not to calculate expected market returns but rather to establish the importance of factoring in volatility when doing financial planning. From this exercise, we can assume that if the average return of the S&P 500 is 10.4%, the true return of the index should be in the neighborhood of 8.5%.

By proceeding, I acknowledge that I have read and understood the Disclaimer and Copyright Statements .

Eight years ago today, my dear mother passed away. (Many of you knew my mom who we called Amazing Grayce which was certainly not a misnomer.) On that day, I began the incredibly difficult process of learning a life changing lesson, which is that I’m not in control of things and that my life wasn’t going to follow my script for it.

So, what the heck does this have to do with your account and my management of it? It’s really quite simple. Investing in capital markets is the one business where you have no control. Mr. Market is in control and he doesn’t care about my opinion or anyone else’s. Even the greatest investors are impotent in controlling the market. In order to attain any success in the business of investing, you have to being willing to submit to Mr. Market. Read the rest of this entry »

On September 14, 2005, 4 years and 3 days following 9/11 attacks, Delta Air Lines (DAL) entered into the equivalent of corporate jail and became wardens of the state/courts. Hopefully they will be granted parole soon.

It was a very sad day in our family as my father is a retired pilot from Delta, giving over 32 years of service to the company. The source of my sadness is not necessarily the financial situation at Delta but rather what their bankruptcy symbolizes to me – the death of an ideology. I grew up in the “Delta Family” and while the airline that C.E. Woolman found will most likely live on, the family he fathered is certainly lost forever.

My fondest Delta memories are of attending the summertime Delta picnics. The swimming pool with the extra-high slide, the “old” guys playing softball, Grandy’s fried chicken and country dancing. One year, we managed to sneak away a couple of our parents’ beers and we went out to the car and tried to act like grown-ups by “throwing one back”. I think I might have been 10 or 11 at the time, so it was a real struggle but somehow I managed. (I think I poured ¾ of mine out while no one was looking.)

When I grew up, I wanted to marry a flight attendant because I knew them to be the sweetest people in the world. (Some of the pilots may disagree with me, but when you’re a cute kid wearing a suit and tie, the women adore you.) On my first flight alone, I was served 5 ice cream sundaes. That was back when non-revving meant sitting in first class.

The only time my brother and I got along was when we were non-revving. We fought incessantly when we were at home but while we were flying our father would constantly remind us that Delta would pull our passes if we didn’t behave. He would tell us story after story about kids having their flying privileges revoked so they had to stay home with the baby sitter while everyone else went to Disney Land. I’m now convinced that these stories were fictional but they worked.

I remember the tremendous pride I felt when our college marketing class studied the “Delta Family”. I remember testimony after testimony of fellow Dallasittes who cherished flying Delta over AA because of the superior service they received. I remember the Spirit of Delta poster on the wall in our game room which was ironically sold within weeks of bankruptcy – the plane not the poster. I remember my dad telling me about how Delta was considered a nothing airline compared to Braniff and how his buddies ribbed him when he was hired in ‘72.

Unfortunately, I also remember making a sales call to Delta and having a member of Delta’s management explaining to me that Southwest wasn’t a competitor. I remember the first strike vote. I remember the revolving door at the upper management level.

I owe a tremendous debt of gratitude to Delta. They offered my father gainful employment which allowed him to send my brother and me to a couple of the finest schools in the country. They offered us the opportunity to be reunited with our extended family every summer and Christmas. The absolute best part about your Dad being a pilot was the flexibility it offered him. My dad coached all my little league teams – even soccer. I cannot remember a HS or college game of mine that he wasn’t able to attend. All though he was gone a lot, he was always there whenever it mattered. Birthdays, Games, School Plays – Anything that mattered, he was there.

Simply put, we consider the web to be an excellent medium for communication with our clients (and prospective clients). While many Financial Advisors view the web as a marketing tool, we prefer to use it as a communications tool. This is a reflection of just one of the unique qualities of our organization – we strive to be a service oriented organization versus a marketing organization. We maintain the belief that if we offer solid service and superior risk-adjusted returns, client acquisition will take care of itself.

For our clients:
We will be using this site to offer insight on a weekly basis into the strategy underlying all our investment decisions. As this is a public forum, we will not disclose everything we are thinking and doing. Our quarterly newsletters will include significantly more detail regarding our strategy with your account.

So, Welcome to our blog. I hope you enjoy the commentary and find it beneficial. Feel free to make any comments.

Matt