Blog

  1. The end of daylight savings.

    The idea of shifting our clocks to make better use of daylight is as old as Benjamin Franklin, who first penned the idea while living in Paris in 1784 when he noticed people used candles at night and slept past dawn in the morning. However, the notion wasn’t given serious consideration until the early 1900’s, and during World War I the first laws were passed driven largely by economic considerations. Now 70 countries have instituted Daylight Savings Time to some degree. Despite many adjustments since then, observance today in America is nearly universal, except in the case of Hawaii and most of Arizona. Arizona felt that with its hot climate, it argued that people prefer to do their activities in the cooler evening temperatures after the sun sets. Hawaii sits so close to the equator that its sunrise and sunset are consistent already and therefore has little need for extra light. Most countries located around the equator have opted out for the same reason. The theoretical arguments for DST – lighter evenings mean lower demand for illumination and electricity – have been debated at length, but it was rather hard to prove. However, when Indiana adopted DST statewide in 2006, after previously observing it county by county, researchers were able to study before-and-after electricity use across the state. In a 2008 National Bureau of Economic Research study, the team found that lighting demand dropped, but the warmer hour of extra daylight tacked on each evening also led to more air conditioning use which more than…

  2. Market Outlook – 3Q 2017

    In my opinion, it is wise to generally avoid pessimists and political provocateurs. Yes, they are right sometimes (and how they love to tell you when they are), but their stock-in-trade is to tell you how the American economic system is going down the tubes. Rather, I prefer to focus on being objective and optimistic. The American economic system is a very powerful engine. When good companies run by talented leaders grow their revenues and earnings, it can produce an impressive market environment. Equity markets posted another strong quarter. Corporate America reported earnings that met, and in many cases, exceeded our expectations. Their forward guidance on revenue and earnings growth are the center of our optimistic market outlook for the fourth quarter and into 2018. Revenue growth among larger companies still exceeds mid and small firms, but the gap is narrowing. Year over year revenue growth for large companies increased to 7.6% in the second quarter (from 7.4% in Q1). For mid-sized companies year over year revenue growth increased to 7.3% in the second quarter (from 6.0% in Q1). We see four things here. One, increasing revenue is the single best source of support for continued earnings growth. Two, there is a sizable gap between earnings and revenue growth which reveals the continuing positive effect of cost cutting implemented in past years. Three, larger companies have greater operational leverage that usually manifests itself first in a growing economy, but mid-sized firms are now starting to catch up. Four, while companies with foreign exposure have done…

  3. (Ir)Rational Behavior

    There is a Nobel Prize given for the dismal science — economics. Since prevailing economic theories seem to change with the weather, it may seem pointless to award a prize in the field. The recent award to Richard Thaler, however, is spot on. Thaler’s work is in the area of behavioral economics. Simply put, he studies the irrational behavior of humans in the way they handle their finances. For example: You have $10,000 in a savings account earning virtually nothing. Say you have $7,000 in credit card debt charging 18% interest. Logic would indicate you should tap the former to pay off the latter. Many, if not most, people do not. Why? Thaler found that people place a higher value on what they have than what they do not, therefore it seems more important to keep the cash than to part with it, even though there is future expense involved. He found that when the price of gasoline drops, many drivers switch to premium rather than save the difference. He learned that if a cab driver is having a slow day, he will work longer hours to try to make up for it; conversely, if he is having a busy day, he will quit early, even though the exact reverse would make better economic sense. You can read more here. It is well documented that when employees are offered a default choice to opt into a retirement savings plan rather than to opt out, many more join the plan, though the number should logically be…

  4. Going up?

      Interest rates are going up. In fact, they have begun rising already. Since December 2015, the Federal Reserve has raised the overnight interest rate from 0% to 1.25% through five quarter point increases. They are also signaling one more in December and up to three of four more next year. And if you take into account a coming leadership change at the Federal Reserve, these plans could become more aggressive in removing accommodation. So what does this mean for portfolios? The effect on equity securities will be muted, for a while. Equities typically like a little inflation; we are in a sweet spot between 1.0 and 2.0%. Equities also like interest rates to keep themselves in a range too. The boundaries of this range can change based on market conditions, but we are in another sweet spot there too. Rates are still low enough to encourage businesses to borrow so they can do their own investing. And they are too low to act as competition for investor capital. As rates rise these factors will change, but we think that is rather far away. Equities can exist quite happily with rates staying below four or five percent and nobody is talking about those levels yet. The effect on fixed income is more immediate and surprising, based on what you own. Fixed income prices are based on interest rates and the math that calculates your cash flows back to today. When rates go down, fixed income securities’ value goes up because your fixed cash flows are now…

  5. Are value stocks dead?

    How is it that stock markets can continue to hit new highs when the world is facing so much uncertainty? From the toll of natural disasters to an increasing array of political populism and saber-rattling of North Korea, nothing has yet sent markets off course. The fact is that financial factors still matter more. But when we look past the broad averages and push a little deeper, we can see asset class diversion that puts a different story behind the numbers. We have been keeping track all year of the performance gap between growth and value stocks. The former is up more than 19% while the latter has only managed a 5% gain in 2017*. Why has growth done so well while value has not? There are several explanations for the difference and there is something we can do about it. A small part stems from value’s strong performance in 2016 when it was up over 18% vs 7% for growth. Some of this is simply mean reversion. A more meaningful explanation derives from economic growth. Growth typically does better when economic growth is modest, while value typically does better when economic expectations are generally rising. Our economy is still growing at about the same 2% average we have seen since 2008, a bit of a letdown from higher expectations held at year-end. Investors put a premium on companies that can generate above average growth in any environment, which explains why technology is the only sector to exceed the overall returns from growth benchmarks. This…

  6. Finally.

    The Fed continues to un-amaze. If predictability is the key to a strong economy and strong markets, there is nothing to worry about. On the other hand, if gridlocked politicians, North Korea, miscellaneous hurricanes and a wild-card president are relevant to the economy, well, perhaps attention should be paid. Janet Yellen indicated that a rate hike, probably .25%, will come to pass in December with more to follow next year. She also said that the Fed will begin unwinding its balance sheet now, initially by not purchasing new securities as old ones mature. This will remove $10 billion a month from the balance sheet in the near term, gradually increasing to $50 billion a month within 12 months. Depending on how closely this plan is followed, returning to pre-2008 levels would take something over ten years, although we don’t know what the final level will be. A lot can happen in ten years. We are almost ten years removed from the problems that led to low interest rates and quantitative easing in the first place. The beginning of World War II to the beginning of the Cold War took less time. The smart phone is just ten years old. Within ten years of President John F. Kennedy telling the country we had the resources and talents necessary to land an astronaut on the moon, we did just that. Perhaps all will go smoothly for the Fed and the economy, but it probably will not. An asset reduction plan has never been tried by any Central…

  7. Time to drop the inflation target

    Low inflation is becoming a problem for Janet Yellen and the Federal Reserve. We could be forgiven for thinking low and steady inflation in a growing economy was a good thing. But it wasn’t supposed to be this way. Forecast models used at the Fed rely in part on something called the Phillips curve. Created by A.W.H. Phillips through his study of wage inflation and unemployment in the United Kingdom from 1861 to 1957, the curve was said to reflect a consistent inverse relationship. When unemployment was high, wages only increased slowly; when unemployment was low, wages rose rapidly. Fed forecasts have consistently predicted that, as our unemployment rates moved downward over the last several years, wage growth would accelerate, allowing them to reverse the significant easing implemented after 2008. Once we crossed the level they felt represented full employment, currently 4.6%, wage growth would accelerate. Problem is, wage growth has only grown slowly the entire way. Even with a 4.4% unemployment rate (it crossed 4.6% in March), wage growth is unchanged and inflation has actually declined. This isn’t what the models predicted. Furthermore, since that target was created in 2012, inflation has resisted 2% for most of the past five years. There are some economists claiming that the Phillips curve is all but dead. Some critics believe the 2% target was too high in the first place, that various global factors have had the effect of permanently lowering the long term trend of inflation. In any case, the Fed is approaching a fork in…

  8. Retirement Success Needs a Good Plan

    Benjamin Franklin is supposed to have once said, “If you fail to plan, you are planning to fail.” When we want to get from here to there, leaving success to chance is a fool’s errand. The path to a successful retirement is long and winding. Creating a plan for your family is critical to anticipate and prepare for change, to measure your progress, and clarify roles and responsibilities. According to the Department of Labor, fewer than half of Americans have calculated, let alone simply thought about, how much they need for retirement. In 2014, 30% of private industry workers with access to a defined contribution plan (such as a 401k), did not participate. Keep in mind that the average American spends 20 years in retirement, which means many spend much more time. They also suggest the following sensible steps, click here to find out more: 1. Start saving and keep saving. You should save for retirement with your first paycheck and continue to your last. Some experts recommend saving as much as 15 percent of each paycheck — after tax. 2. Figure out your retirement needs. Think about what you want to do. 3. Contribute to your employers retirement savings plan, as much as possible 4. Do you have a pension plan? Learn about it. 5. Consider basic investment principals such as inflation, diversification, compounding and the like. Educate yourself. 6. Don’t touch your retirement savings for anything other than retirement. 7. If your employer doesn’t offer a plan, ask them to start one. Be…

  9. A hand up

    Give a man a fish, and you feed him for a day. Teach a man to fish and feed him for a lifetime. Never definitively attributed to one source, the spirit of this proverb encapsulates the mission of Metro Lutheran Ministries (“MLM”), who want to offer a hand up, rather than a hand out. Started in 1971 by Kansas City Lutheran churches working in partnership, MLM helps people in need regardless of race, religion and nationality. Their goal is to provide clients a clear path to self-sufficiency through a continuum of care that immediately addresses short term stability and eventually helps clients achieve lasting stability. Immediate needs are met through food assistance programs offering breakfasts, sack lunches and monthly food distributions and community gardens. Other initiatives focus on housing security and stability to help clients live in dignity and safety. Longer term needs are addressed through income sufficiency programs designed to educate and empower families to better control their own finances and futures. Through offices in mid-town Kansas City, Kansas City-North and Wyandotte County, KS., MLM relies on over 2,000 volunteers that give over 17,000 hours of their time, a crucial component to meet the needs before them. Last year alone, they distributed 800 sack lunches to clients who came in for other types of assistance. They staffed and ran the Christmas Store, an annual effort to make Christmas a little merrier, helping more than 4,000 clients. They maintained the orchard and community gardens which produced over 2,400 pounds of healthy fare for the nearby…

  10. What will tomorrow bring

    “It was the best of times; it was the worst of times.” We make no claim for originality — that belongs to Charles Dickens, writing in the nineteenth century about an event, the French Revolution, that occurred in the eighteenth century. All that brings to mind an old cliche: “The more things change, the more they remain the same,” or even Dwight Eisenhower’s famous garbled quote: “Things are more like they are now than they ever have been.” The point of this verbal meandering? Simply that the world is always unsettled somewhere. Good and bad events are not mutually exclusive, they have gone on side by side for all of history. As investors, we watch events and consider how they will affect the economy, politics, and, most important, our portfolios. The truth is, we can only guess. We can make educated guesses based on history and experience, but, in the end, there is no certainty. That is why our focus is on earnings and growth. How should this uncertainty influence your investment decisions and instructions to your advisor? That depends, to a great extent, on your personality, your investing horizon, your goals, and the impact it has on your tolerance for risk. When Mitchell Capital is engaged, new clients create a set of investment guidelines, basically setting limits on the equity and fixed income components of their portfolios. These are the directives our managers will follow and serve as the guideposts for moving forward in an uncertain world. At their best, guidelines strip the emotion…