Monday, April 23, 2018

Will the Real P/E Ratio Please Stand Up?

Is the U.S. stock market undervalued or overvalued based on its historical Price/Earnings (P/E) ratio?  It turns out, the answer could be both!  Market analyst Mark Hulbert wrote in a recent column for marketwatch.com that it all depends on how you calculate the measure.  Some financial institutions calculate the current P/E ratio of the market based on its last 12-months of earnings (currently richly valued at 24.92), while others base it on the estimated next 12-month earnings (currently a much lower 16.98).

The dramatic difference between the two numbers leads to a world of confusion for individual and professional investors alike.  Note that traditionally, the gold-standard for P/E calculations is using the prior 12-months of earnings.  Therefore, the next time you hear an argument about whether the market is overvalued or undervalued on the basis of its P/E ratio, make sure that you make the proper distinction between the competing methods. 

And, as Hulbert points out, be particularly wary of analysts who misleadingly mix the two by (typically) comparing the forward estimate with the backwards historical value.  Hulbert says "Because analysts are almost always too optimistic, projected earnings will be markedly higher than trailing earnings. That in turn means that P/Es based on projected earnings will be significantly lower than P/Es based on trailing earnings.  It's an apples-to-oranges comparison."

Womack Weekly Commentary: April 23, 2018


Womack Weekly Commentary


April 23, 2018

The Markets

The world is in debt.

The April 2018 International Monetary Fund (IMF) Fiscal Monitor reported global debt has reached a historically high level. In 2016, debt peaked at 225 percent of global gross domestic product (GDP) (the value of all goods and services produced across the world). Public debt is a significant component of global debt. The IMF wrote:

“For advanced economies, debt-to-GDP ratios have plateaued since 2012 above 105 percent of GDP – levels not seen since World War II – and are expected to fall only marginally over the medium term…In emerging market and middle-income economies, debt-to-GDP ratios in 2017 reached almost 50 percent – a level seen only during the 1980s’ debt crisis – and are expected to continue on an upward trend.”

There are numerous reasons high levels of government debt (the amount a government owes) and significant deficits (the difference between how much a government takes in from taxes and other sources and how much it spends) are a cause for concern:

·         Higher interest payments. Governments typically finance debt by issuing government bonds. When bonds mature, the government issues new debt. If interest rates have risen, the cost of that debt increases. As a result, high debt levels can make tax hikes and spending cuts a necessity, explained the Committee for a Responsible Federal Budget.
·         Lower national savings and income. You may have heard the phrase, “Robbing Peter to pay Paul,” which means taking money from one source to pay another. When a country runs a deficit, a similar thing happens. In The Long-Run Effects of Federal Budget Deficits on National Saving and Private Domestic Investment, the Congressional Budget Office explained, “…a dollar’s increase in the federal deficit results in…a 33 cent decline in domestic investment.”
·         The tax lag. In his book, Do Deficits Matter?, Daniel Shaviro suggests sustained deficit spending creates a ‘tax lag’ by shifting responsibility for current spending onto future generations.

The IMF Fiscal Monitor wrote, “countries need to build fiscal buffers now by reducing government deficits and putting debt on a steady downward path.”

Last week, the interest rate on 10-year U.S. Treasuries rose above 2.9 percent, which raised concerns about inflation. Markets moved higher early in the week and tumbled later in the week. The major U.S. stock indices finished the week higher.


Data as of 4/20/18
1-Week
Y-T-D
1-Year
3-Year
5-Year
10-Year
Standard & Poor's 500 (Domestic Stocks)
0.5%
-0.1%
13.3%
8.3%
11.3%
6.8%
Dow Jones Global ex-U.S.
0.3
0.1
16.4
3.5
4.4
0.2
10-year Treasury Note (Yield Only)
3.0
NA
2.2
1.9
1.7
3.7
Gold (per ounce)
-0.5
3.1
4.3
3.8
-1.3
3.8
Bloomberg Commodity Index
0.6
1.9
6.4
-3.9
-7.3
-8.2
DJ Equity All REIT Total Return Index
-0.8
-8.6
-6.1
0.9
5.4
6.1
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

are you an INsect Gourmet? Throughout history, people have eaten bugs. According to National Geographic, hunter-gatherers probably learned which insects were edible by watching birds. People’s appetite for bugs didn’t disappear as they became more civilized. Pliny, a Roman scholar, wrote beetle larvae fed a diet of flour and wine were a favorite snack of aristocratic Romans.

The tradition of eating insects continues today.

According to National Geographic, “Gourmands in Japan savor aquatic fly larvae sautéed in sugar and soy sauce. De-winged dragonflies boiled in coconut milk with ginger and garlic are a delicacy in Bali. Grubs are savored in New Guinea and aboriginal Australia. In Latin America cicadas, fire-roasted tarantulas, and ants are prevalent in traditional dishes.”

Reuters said in Germany, Netherlands, and Belgium, shoppers can buy burgers made of buffalo worms (the larvae of buffalo beetles) at the local grocery. It’s a visually pleasing product, according to one of the burger company’s founders, because the insects don’t show.

In North Carolina, diners can order a tarantula burger, described as “…a hamburger topped with a crunchy full-grown, oven-roasted tarantula.” It comes with a side of fries – and possibly a drink to wash it down as fast as possible. Other restaurants across the United States offer fried silkworm larvae, red ant salad, cricket crab cakes and cricket pastry, and grasshopper rolls, according to Reuters and Spoon University.

Bon appetit! (Or should that be bug appetit?)

Weekly Focus – Think About It

“Then I say the earth belongs to each of these generations during its course, fully, and in their own right. The 2d. generation receives it clear of the debts and encumbrances of the 1st., the 3d. of the 2d. and so on. For if the 1st. could charge it with a debt, then the earth would belong to the dead and not the living generation. Then no generation can contract debts greater than may be paid during the course of its own existence.”
                                                                                                                    --Thomas Jefferson


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Womack Investment Advisers, Inc.

WOMACK INVESTMENT ADVISERS, INC.
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Womack Investment Advisers, Inc. (WIA) is a registered investment adviser whose principal office is located in Oklahoma. Womack Investment Advisers, Inc. is also registered in the State of California, the State of Illinois, the State of Indiana, and the State of Texas. WIA only transacts business in states where it is properly registered, or excluded, or exempted from registration requirements.

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* These views are those of Carson Group Coaching, and not the presenting Representative or the Representative’s Broker/Dealer, and should not be construed as investment advice.
* This newsletter was prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with the named broker/dealer.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly in an index.
* Stock investing involves risk including loss of principal.
* Consult your financial professional before making any investment decision.
* To unsubscribe from the Womack Weekly Commentary please reply to this email with “Unsubscribe” in the subject line or write us at megan@womackadvisers.com    
Sources:
http://www.imf.org/en/Publications/FM/Issues/2018/04/06/fiscal-monitor-april-2018 (Click on Chapter 1, Full Text of Chapter 1, page 1)
http://online.barrons.com/mdc/public/page/9_3063-economicCalendar.html (Click on “U.S. & Intl Recaps,” then "Geopolitical concerns ease")

Friday, April 20, 2018

Why You Should Hire a Financial Planner, Even if You’re Not Rich




If the very idea of financial planning makes you break out in hives, you’re not alone. A new study found that perceived financial well-being — feeling secure about not only the state of your current situation but how well you’ve planned for the future — holds the key to your overall well-being. Your financial security can affect you as strongly as job satisfaction, relationship stability, and physical health combined.

Certified Financial Planner Board of Standards ambassador Jill Schlesinger calls money the “most concrete expression of every neurosis we carry. Every neurosis we have, we can express it around money,” she said. “Someone dealing with your finances can really be transformative — it’s like removing an anvil from your back.”

First, know thyself, financially

 

Regardless of your financial state, everyone can benefit from taking stock of what stability means for you. Kristin Wong, freelance journalist and author of “Get Money: Live the Life You Want, Not Just the Life You Can Afford” knows how uncomfortable that feels. “It can be hard to sit down and look at the numbers, especially if you know you’re in mounds of debt but you’re not sure how bad it is,” she acknowledged. “But think of it this way. Yes, it’s unpleasant now, but you’re saving yourself from more unpleasantness later.”

For many of us, it all starts with understanding our own habits. Ms. Wong suggests starting by tracking your spending right down to your 3 p.m. vending machine run. “This is such an eye-opening exercise because it forces you to think about your spending a little bit more, which then makes you more aware of how you’re spending,” Ms. Wong explained. “Writing down your spending gives the transaction a sense of tangibility.”

Next, figure out what you want

 

Whether you’re a recent graduate trying to figure out how to handle student loans, a retiree looking to maximize your 401(k), or anything in between, we all want our money to work for us. “Americans need to understand that [financial planning] isn’t just for the wealthy,” explained Geof Brown, CEO of the National Association of Personal Financial Advisors. “It’s important to sit back and reflect on your own individual circumstances, understanding your long-term goals.”

Ms. Schlesinger organizes some basic goals into what she calls the “holy grail” of financial security. “People have three big priorities in life,” she explained. “They want to be consumer debt-free. They want to have an emergency reserve fund, like 6-12 months of your expenses sitting in some boring account. [And] they want to maximize their retirement account.” Once you have those figured out — or a plan for how to get there — the real fun begins.

Here’s when to call in the pros

 

“Using life events as a prompt is a great idea,” Ms. Schlesinger said. “Maybe you and your spouse look at finances differently. A financial adviser can act as a mediator. Because money can be so emotional, bringing in someone else can help bridge the gap.”

Life events like graduating from college, getting married, and buying property, all mark great times to start thinking about your financial future, but there is no wrong time. “My mantra is that it’s never too early to find the services you need and to take advantage of that knowledge,” Mr. Brown said.
Linda Rogers, of Planning Within Reach in Memphis, Tenn. said her clients come to her for help prioritizing, at all stages. Even if you know you should plan for the future, a professional can help you enact and stick to a solid plan. “With a financial plan, [clients] receive a road map for the future and someone who catches things that slip through the cracks,” Ms. Rogers explained.

Financial planners can help clarify the process

 

While the average person can probably pay down credit cards, set up a Roth IRA, and do some basic investing online, professionals can help streamline the nuances of financial planning.
“I liken it to WebMD. You can look up symptoms, but there’s a limit to what you can do with that information,” Mr. Brown explained. “Finance is the same way — you can find a lot of ofof things on your own, but you need that deep knowledge.”

Even experienced financial advisers don’t always handle their own cases. “I find that it is harder to manage my own affairs than those of my clients,” admitted Barry Korb of Lighthouse Financial Planning in Potomac, Md. “If I was a doctor, I hope I would know enough not to treat myself. If I was a lawyer, I hope I would know enough not to represent myself. Yet as a financial planner/adviser, I perhaps try too hard to manage my own affairs.”

Know what to look for

 

According to Jeff de Valdivia of Fleurus Investment Advisory in Fairfield, Connecticut, “The term ‘financial adviser’ is so used and misused that it means almost nothing. A financial adviser should be a person knowledgeable about financial matters who provides expert advice in a way that promotes the financial well-being of [their] clients.”

Many people prefer a fee-based adviser, in which the client pays directly for advice and services, rather than purchasing a plan. You also want to ensure your adviser took a fiduciary oath, meaning they must legally put your needs ahead of theirs. Finally, ask if they’re C.F.P. board certified. That ensures they adhere to a certain level of competence and ethical standards.

The N.A.P.F.A. organization carefully vets all of its members, providing what Mr. Brown calls a “Good Housekeeping-like seal of approval.” Both N.A.P.F.A. and C.F.P., as well as the Garrett Planning Network, provide search functions that can help you gather a list of reputable planners and advisers in your area.

Less concretely, you also want to feel comfortable with your financial adviser. Mr. Brown likened a financial adviser to a family doctor — someone who will be with you over the long haul. Find someone with whom you can let all of your finances hang out. After all, brutal honesty is in your best interest.

Trust the process

 

A good financial adviser will help you set a plan for getting and keeping your finances in shape. Because finances are attached to fallible humans and, to an extent, volatile markets, plans often grow and change over time. For Marianela Collado of Tobias Financial Advisors in Plantation, Fla., finances do not follow a “set it and forget it” strategy. That means adhering to the three R’s: revisit the plan, recalibrate, and reroute as necessary.

“With each event, things change. Finances change,” Mrs. Collado explained. It’s important that your adviser remain flexible to revisiting your plan when and if your life circumstances change. Once you tweak that plan, it could require a reroute. “Maybe you had built up emergency savings and then there was an emergency, so you needed to deplete those funds,” Mrs. Collado said. “We would then reroute what was going to 401(k) savings or investment accounts back to the emergency funds to replenish.”

Regardless of your income, you can be helped

 

Financial health — just like the physical or mental kind — takes time and effort. “It doesn’t happen overnight. You don’t have to understand everything about personal finance at once,” Ms. Wong said. “Start with one thing and focus on feeling good and confident with that one thing, even if it’s paying an extra $10 a month toward your debt, or learning to say no to an impulsive purchase. Start small, and you’ll get there.”

And no matter what your past financial life looks like, recovery is possible. “When it comes to managing money, feeling a sense of power or control over your situation is crucial,” Ms. Wong added. “A good way to start is to stop beating yourself up over your past money mistakes. Bad debt, impulsive spending, too many parking tickets — whatever it is, learn a lesson from it, but then let it go.”

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