BARRINGTON FINANCIAL ADVISORS, INC.
a Registered Investment Advisor
(Celebrating 42 years of Professional Service)
August 2014 Rebound
EQUITIES, MLPs and REITS:
We just experienced the best August in 14 years as the S&P 500 gained 3.8%. One indicator of why this happened is the S&P 500 Volatility index (VIX), which fell from 17.03% at the beginning of August 2014 to 12.09% at the end of August 2014. As you may know, this Index is a measure of fear in the market where many consider below a 20.0% index generally corresponds to less stressful, even complacent, times in the markets. Our Equity, MLP and REIT portfolios returned from a 4.2% to a high of 5.2% performance for August 2014 with the average of 4.65% thus beating the S&P 500 while having a lower risk rating.
During the month I put more of our money to work using the larger cash position to purchase MU, HCLP,HES,WLK,DOW,CPE,AMZN,UA,LNKD,FISI,REX,BITA,PLNR,CMI,Z,SWIR,EPD,TWTR and HMES. I also sold SINA. This was a lot of activity but many of the purchases were to buy back stocks that I sold at the end of July before the large drop in the market on July 31, 2014. These buybacks are now performing for us. A few examples are BITA up 9.48%, CPE up 5.99%, FB up 21.27%, FISI up 4.30%, HCLP up 12.82%, PLNR up 14.30% and WLK up 9.39%. Some have not yet began to perform such as SWIR down 1.96%, UA down 1.71% and EMES down 0.50% since these were purchased towards the end of August 2014 and have not had time to move.
In summary of the Equity, MPL and REIT holdings, I am well-pleased with our August 2014 performance and hope September is a good month as well.
FIXED INCOME:
We experience little change in the Fixed Income portion of our portfolios while keeping the percent of the total portfolio very low in relation to the overall Total.
ECONOMY
This is not the way things are supposed to be five years into an economic expansion, yet it’s the conclusion of yet another report probing chronic economic gloom. The new survey, by the Heldrich Center at Rutgers University, found 71% of Americans feel the recent recession changed the nation permanently and only 16% feel the next generation will end up better off. In 1999, 56% felt life would be better for future Americans.
It’s axiomatic that something is wrong with the U.S. economy — but gloom itself may be part of the problem. Americans are so dour by some measures, they seem to be looking past opportunities as if programmed to see only pitfalls. Prosperity doesn’t come from the places many people seem to be seeking it, and if the middle class is, in fact, in decline, a large part of the reason may be a lost instinct for how to get ahead.
To be sure, there are well-known problems with the economy that aren't easily solved. Wages are stagnant for many workers, household wealth remains depressed and many families are falling behind. Adding to the gloom, policymakers in Washington seem incapable of finding solutions, and they even make some problems worse.
It’s also true, however, that the economy is growing at a decent pace, companies are hiring, and consumer spending, on the whole, is pretty good. In reality, we don’t have one U.S. economy, we have two: one that looks like the old one, in which people work hard and get ahead, and another filled with those glum, underemployed laborers living on the edge. There has always been an American underclass, but it seems to be growing, fed by a continual drip of downwardly-mobile people departing the middle class.
The recession officially ended more than five years ago and ought to be a distant memory. These should be boom times with widespread optimism and robust spending. Yet, consumers are gloomy and the economy is limping along at subpar levels of growth.
It’s becoming clear why: While jobs have returned, incomes have not. The latest evidence is a study by the U.S. Conference of Mayors that highlights stark disparities between the jobs lost during the recession and jobs gained since. The types of jobs lost paid nearly $62,000 per year, on average. The jobs gained during the past six years pay only about $47,000. That 23% shortfall adds up to about $93 billion in lost wages per year — money not being spent because it vanished from the economy.
That startling wage gap reflects the demise of well-paying jobs that don’t require a college degree, which may be the single-biggest challenge facing families trying to uphold a middle-class lifestyle. The two sectors that lost the most jobs during the recession are manufacturing, with average pay of about $63,000, and construction, at about $58,000. Employment in those two fields is still about 3 million workers short of where it was at the start of 2008.
It is my prayer that America wakes up to the reality of how poor the country’s leaders are doing in managing our economy and we make a drastic change in the elections that are coming up soon. We need elected people who understand how to solve the economic problems facing our nation. A recent poll of American voters revealed that many people think that Global Warming is a greater threat to America than the threat from Terrorists. We need to support Israel and build our defenses before we have another attack on American soil. May America return to God and receive His continued blessings. AMEN.
Have a Blessed Day,
William C. Heath, CFP®
Chairman & CEO
(713) 785-7100

Cut & Run? I think some of this reflects the increased market participation of smaller investors compared to say 100 years ago.
A lot has to do with technology and the speed with which all of us can execute trades, track returns, etc.
Rarely cited is the demise of front-loaded funds. Say what you will about them ... but one advantage was investors were more inclined to stay put having paid a fee to get in.
Some of what we observe is the consequence of "self-selection." Most at MFO enjoy following the markets daily or weekly - with some notable exceptions. As group we're probably more inclined to move in and out of investments than the typical investor. (If you come to the ball, you'll probably dance.)
What some consider "cut & run" may actually fall into the "momentum investing" category. Not my cup of tea - but a legitimate and very profitable method for some.
John C - It's very hard to guess market direction. Sentiment is one indicator.

Ted thanks for posting this. I have put this fund on my watch list and plan to study it in more detail. I have found through the years that Virtus has some fine funds. This new product does look interesting.
I have linked its fact sheet below.
https://www.virtus.com/vsitemanager/Upload/Docs/FS_Strategic_Income_1100.pdf

Q:
"I think you're also looking at a smaller pool of retail investors as a % of the broad population than you had 5-10 years ago."
A:
That might be a good thing, suggesting that the smaller pool is perhaps a little more seasoned, and maybe a little less inclined to cut and run. But, who really knows?
Are you hearing about more of the general public investing in the markets? Before the tech crash of 2000, it seemed like everyone was into stocks. After that event a lot of those swore off the markets and I didn't see many return or even talk about it. Perhaps the last couple of years have been different?

FYI: With interest rates at historic lows for a number of years, and the specter of a rate hike on the imminent horizon, fixed-income investors may face a difficult road ahead. Traditional strategies are unlikely to work, which is why it’s fortunate that investors now have access to a wide range of products that generate income from non-traditional sources. On September 9, a total of three alternative fixed-income mutual funds were launched: one by Virtus Investment Partners, and a pair by Boston-based Newfound Research.
Regards,
Ted
http://dailyalts.com/virtus-newfound-hit-market-alternative-income-funds/

@jlev
I'm only parroting what I read several years ago: 10-15% bonds in a portfolio will not produce significant protection, since the percentage is too small. Made sense to me then, and now. (This begs the question whether a 29 y.o. needs portfolio protection.) If you have ongoing contributions, you are averaging in when the market is down as well as when it is up. You might be better advised at your age to park some money in cash and watch for the decline (like when ARIVX is fully invested, you'll only be a little bit late.)
With 20 years to go before I'd start buying bonds or bond funds (if I were your age), presuming 35 - 40 years until retirement, and presuming that new money would go into bonds at that time, the stock funds, stock ETFs, or stocks you buy now would have had a run of 30 to 40 years when you retire, if you can keep your hands off the trading icon (except for the individual stocks - I'd watch [or avoid] those). Since few managements are stable over that period of time, index funds are appropriate.
You are paying a significant portion of bond fund gains in ER currently. Looking at my bond fund purchases (all recommended at MFO, which include some of your choices) in the past 2 years, I find minimal gain and some losses, aside from the River Park funds, where I am paying about 20-25% of my gains in ER. (I regard those as geezer funds, btw.)
Since I doubt most currently successful bond funds will have the same management in 20 or 30 years, I have no recommendations. The big companies, such as Fido and Vanguard, can buy brains; smaller funds are a crap shoot. If you want shorter term recommendations, you have many above.
I assume you have read William Bernstein. If not, check him out. I
don't anticipate participating further in this topic.

One prediction I happened upon in reading tonight. HA!
http://www.condenaststore.com/-sp/I-come-from-a-hundred-years-in-the-future-to-warn-you-that-nothing-really-New-Yorker-Cartoon-Prints_i12238424_.htm

Bond laddering is certainly an excellent approach for investors who hold for the long term and buy individual issues. Buying or holding bond mutual funds in these uncertain times with a lower duration is another.
TPINX duration is 1.6 years. They hold 42% cash per M*.
LSBDX duration is 4.3 years. They hold 8% cash.

Successful Bond Mutual fund managers will execute bond laddering correctly. Dan Fuss is one I trust has seen a rising interest rate environment before. Many younger bond managers have not. It will be interesting to see which bond funds weather a rising interest rate environment most successfully.

The open end junk munis are the last men standing in Bondville it appears and wonder how much longer that can last. Negative language from the Fed Wednesday afternoon may already be baked in the bond market. Heaven forbid if something comes out more negative than expected. It may be time to revisit the bank loan/floating rate arena? If the scenario in the link below comes to fruition we may be seeing 3%+ money market rates in a couple years. I would be pleased as punch and think some of the old timers here would jump at joy at that kind of (almost) risk free yields.
http://blogs.barrons.com/incomeinvesting/2014/09/12/focus-on-the-feds-longer-term-rate-projections/?mod=BOL_hp_blog_ii

"I think you're also looking at a smaller pool of retail investors as a % of the broad population than you had 5-10 years ago."
That might be a good thing, suggesting that the smaller pool is perhaps a little more seasoned, and maybe a little less inclined to cut and run. But, who really knows?

I think they're going to cut and run, it's just human nature (shrugs.) 1. There should be far more financial education in this country, but I doubt that will ever happen. 2. I actually do ponder whether investors who own individual names are less prone to cut and run, because if they have a set of individual names that they have a significant interest and attachment to, are they less likely to dump those shares then a diversified fund whose holdings they probably haven't researched? I dunno.
It does fascinate me when fund managers are surprised and upset at retail investors who run for the exits during a downturn - again, there should be better financial education in this country, but again, it's an element of human nature. It wouldn't surprise me to see more large fund managers open funds in London (see the Pershing Square IPO in London later this year) or start reinsurance vehicles in the US (Greenlight Reinsurance, Third Point Reinsurance) in a search for permanent capital.
I *do* think that along with a smaller pool of investors than 5-10 years ago, you are also seeing alongside that significant buybacks at major companies and a smaller pool of shares outstanding, which those that are invested are benefiting from.
I am concerned by the mass of IPOs hitting the market. Not so much Alibaba (which I actually think is interesting, I'm rather fascinated by Alibaba and similar co Tencent), but things like Dave and Busters (which I think failed in plans to come to market once or twice before.)
As for Alibaba, I am concerned that the media isn't really discussing the fact that you aren't going to be investing directly in Alibaba with next week's giant IPO, but in a Cayman holding co. ("“You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited because we are incorporated under Cayman Islands law, we conduct substantially all of our operations in China and most of our directors and all of our executive officers reside outside the U.S.,” Alibaba said in its filing - http://www.usnews.com/news/articles/2014/09/08/alibaba-aims-for-record-24-billion-stock-ipo.)
The roundabout way of investing in Alibaba via Yahoo or Japanese co Softbank is actually investing directly.

"I think you're also looking at a smaller pool of retail investors as a % of the broad population than you had 5-10 years ago."
That might be a good thing, suggesting that the smaller pool is perhaps a little more seasoned, and maybe a little less inclined to cut and run. But, who really knows?

I think there's worry and there's a significant amount of investor psychology that is still damaged. I do think that things aren't as rosy as the media would like to make them out to be, but I think if you're looking at broad retail sentiment, it's not euphoric (nor do I think it will be for a long time - again, I still think there are individuals who don't want anything to do with the market. Young people aren't investing.) Time is what it will take and I think another 2008 or even a milder crisis will just reinforce people's opinions who are staying away from the market. In the meantime, those who are in the market will be protected to some degree against inflation and asset wealth in this country will be consolidated within a smaller and smaller portion of the population.
Long story short: I think that there's a lot of things that aren't good broadly, but some sectors of the economy are doing well or very well. I don't think investor sentiment is too optimistic, but I think you're also looking at a smaller pool of retail investors as a % of the broad population than you had 5-10 years ago.

Chevron needs partner, contracts before moving on Kitimat LNG, CEO says
Sep 12 2014, 12:34 ET Seeking Alpha
“We have an advantaged resource in the Horn River basin, but the costs are very high. You have to have good alignment with partners," Watson says, so the company is working with aboriginal groups in the area and performing initial work on the site.British Columbia is closer to Asian markets than some competing parts of the world including the U.S. Gulf Coast, but the latter area's projects that are moving ahead because existing infrastructure makes them easier to develop, the CEO says.
http://seekingalpha.com/news/1980685-chevron-needs-partner-contracts-before-moving-on-kitimat-lng-ceo-says
Oil and gas company debt soars to danger levels to cover shortfall in cash
Energy businesses are selling assets and took on $106bn in net debt in the year to March
By Ambrose Evans-Pritchard The Telegraph
6:10AM BST 11 Aug 2014
The net debt of 127 oil companies from around the world rose by $106bn in the year to March
The EIA said revenues from oil and gas sales have reached a plateau since 2011, stagnating at $568bn over the last year as oil hovers near $100 a barrel. Yet costs have continued to rise relentlessly. Companies have exhausted the low-hanging fruit and are being forced to explore fields in ever more difficult regions.
The EIA said the shortfall between cash earnings from operations and expenditure -- mostly CAPEX and dividends -- has widened from $18bn in 2010 to $110bn during the past three years. Companies appear to have been borrowing heavily both to keep dividends steady and to buy back their own shares, spending an average of $39bn on repurchases since 2011.
The agency, a branch of the US Energy Department, said the increase in debt is “not necessarily a negative indicator” and may make sense for some if interest rates are low. Cheap capital has been a key reason why US companies have been able to boost output of shale gas and oil at an explosive rate, helping to lift the US economy out of the Great Recession.
Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” he said.
http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11024845/Oil-and-gas-company-debt-soars-to-danger-levels-to-cover-shortfall-in-cash.html

I know David would love for us to get into a heated debate about the upcoming elections. :)
OK - Just kidding. But I think so much depends on which way the political currents blow in coming months. The party in power has great influence over Fed leadership, court appointments, budget, industry regulations, tax policies. etc. Unfortunately, our fiscal and other national policies often are short sighted as a consequence. Price we pay, I guess, for self government.
Tom Gallagher of ISS on the old Wall Street Week was the best I can remember at analyzing national & Washington undercurrents and translating those perceptions into actionable advice for investors.
Made many great calls over the years. He retired and than resurfaced again elsewhere. If anybody has anything by Gallagher in recent months I'd love to see it. For old-time's sake, here's a list of frequent cast members on the old Wall Street Week program. Best free investment advice under the sun. http://www.tvguide.com/tvshows/wall-street-week/cast/205345

My equity exposure remains relatively low for many reasons - mostly personal factors. I'm however very curious about commodities because I feel they may represent a profitable short term trading opportunity (also one fraught with peril). Pundits like to cite $40 oil 10-15 years ago. Humm ... Do these guys seriously think $1.50 - $2.00 gas at the pump would be a sustainable price for very long?
FWIW

I think if oil goes much below $80 a lot of production will go offline and you will cause a sizable upset in a lot of the debt-ridden junior oil companies.
I mentioned this a few months back, but it is worth repeating:
"The U.S. drive for energy independence is backed by a surge in junk-rated borrowing that’s been as vital as the technological breakthroughs that enabled the drilling spree. While the high-yield debt market has doubled in size since the end of 2004, the amount issued by exploration and production companies has grown nine-fold, according to Barclays Plc. That’s what keeps the shale revolution going even as companies spend money faster than they make it." (http://www.bloomberg.com/news/2014-04-30/shale-drillers-feast-on-junk-debt-to-say-on-treadmill.html)
One of Rice Energy's PRs ends with this: "Certain of our wells are named after superheroes and monster trucks, some of which may be trademarked. Despite their size and strength, our wells are in no manner affiliated with such superheroes or monster trucks." (http://www.bloomberg.com/article/2014-06-02/aHEbwYkhOK5s.html)
Is shale real? Absolutely. However, I think there's a line where production is no longer economical and, if crossed for a while, I'm curious how heavily indebted companies will fare.

XX beats XY.
St. John Bogle says Social Security is your bond fund.
...
I do like the EM bonds, tho, but most of your bond funds are for geriatrics. We pay 20 to 40% of our return in expenses for security, which you don't need unless you will really pull the trigger and sell them all and buy stocks at the next correction, if you recognize it in time. Those funds are for fifty-somethings.
High yield with a low ER is probably OK, but they act like stocks in the crash, but recovered faster last time. (Of course, if you are in them, you might have trouble making yourself sell after a loss to buy stocks.)
...
15 to 20 years from retirement, I'd start looking at bonds in moderation, but you might be so rich by then that it wouldn't matter.
Be sure you marry the girl.

I'd be interested to hear what are your list of less geriatric bond funds to check out, In my musings since posting this I noted PONDX, but I'm not sure if that fits your criteria. I'm comfortable with and aware of the SS argument of Bogle, but am not investing here for income, just mild diversification. As you suggest I've been thinking of staying 85-90% equities - currently in a 3:2:1 ratio in US:Developed:EM - until I'm 45-50 or so.
As for DNA sequencing I have some family involved in the business so it's been done. I'm a bit special, but not enough to worry about an early death.
And yes, I shall marry the hell out of the girl.
@AndyJ Agreed about ARTFX and high yield in general, makes an EM bond fund seem maybe a better play for diversity.
@Junkster Hiking in the Sierras is one of our favorite weekend past times. Thank you for the good wishes.

Paul McCully of PIMCO made a curious statement late Thursday (CNBC) that may help answer Catch's question. Essentially, he believes the Fed is concerned that by withdrawing the "foreseeable future" clause they will: "... likely initiate a sizable stock market correction."
I think Fed watching is way overdone and don't pay any more attention to McCully than the other blow-dry pundits. Most of the time in recent years markets have simply "gagged" for a few hours or days following changes in Fed language and than resumed their prior trend.
The recent uptick in long term rates is however very significant and probably a big factor in the commodities slide. Many media pundits grossly oversimplify the relationship between the Fed and longer term rates. While the two are intertwined, markets in the end set long term rates. The Fed's authority to "set" rates is at the very very short end. What "QE" did was give them some badly needed (and artificially induced) leverage at the longer end. With QE coming to an end, I guess it's natural for longer rates to react more to economic conditions.
My equity exposure remains relatively low for many reasons - mostly personal factors. I'm however very curious about commodities because I feel they may represent a profitable short term trading opportunity (also one fraught with peril). Pundits like to cite $40 oil 10-15 years ago. Humm ... Do these guys seriously think $1.50 - $2.00 gas at the pump would be a sustainable price for very long?
FWIW
PS: OK - Bit the bullet today and made a small speculative wager in the commodities pond - which is in addition to my typical static weighting in that area. Left some room to add a little more if they go lower. I expect that the next time the thermometer hits -40 in Minneapolis, should be be to unload these positions for a small gain:-).

XX beats XY.
St. John Bogle says Social Security is your bond fund.
Check the ER of your bond funds against yearly return and quit investing like a geezer (unless you have some chronic illness or a bad genome - I think you can get your DNA sequenced for less than a grand now, so it might be a good investment or cost you the XX, if the results are bad).
I do like the EM bonds, tho, but most of your bond funds are for geriatrics. We pay 20 to 40% of our return in expenses for security, which you don't need unless you will really pull the trigger and sell them all and buy stocks at the next correction, if you recognize it in time. Those funds are for fifty-somethings.
High yield with a low ER is probably OK, but they act like stocks in the crash, but recovered faster last time. (Of course, if you are in them, you might have trouble making yourself sell after a loss to buy stocks.)
If I had known at 30 what I know now....
But I didn't.
Now, I'd either sequence my genome (or not, if that's too deterministic), invest in a total US stock index for 50%, non-US world index for 30%, EM (probably managed funds) for 10%, and allow myself 10% to chase fads. If you believe that small caps add value, you can adjust the recommendations by 5 -10% in the first 2 categories, but the ER increases. 15 to 20 years from retirement, I'd start looking at bonds in moderation, but you might be so rich by then that it wouldn't matter.
Be sure you marry the girl.

MikeM
"Why is it any different in your later years than in your younger years
if you have the appropriate risk-reward allocation?"
What is 'the appropriate risk-reward allocation' ?
What is 'later years'?
And, are you familiar with the Sequence of Returns?
Of course, someone who sold everything at the market bottom and
never returned missed the grinding years of recovery.
But perhaps being in their 'later years', they may have already earned enough
to be satisfied.

BIP owns 27% of Vale's infrastructure. From Q2:. "We also continue to work toward the completion of the previously discussed acquisition of 27% of Vale’s Brazilian rail and port business, VLI. This business consists of approximately 4,000 km of rail integrated with five inland terminals and three ports. VLI to deploy over R$6.0 billion to upgrade and expand operations over the next seven years, allowing it to capture volume growth from increased activity in the agriculture, steel and other industrial sectors in Brazil. We are working through a number of customary closing conditions and expect to close this investment early in the third quarter."
Q3: "In mid-August, we expect to close on our investment in VLI, a Brazilian rail and port business, as we have satisfied all consents required for closing this transaction. This investment will provide us with approximately $300 million of organic growth projects, as the business has a substantial capital program to expand operations."
I'd rather own that than Vale, but otherwise, BHP is something that I've thought about a whole lot but continue to stick with Glencore due to Glencore's diversity, legendary trading operation and exemplary assets.