Friday, November 22, 2013

Fund Focus: A Dow Point Today

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November 22, 2013

Market Flash

Retail sales were stronger in October than expected, even without a "lift" from the introduction of the new iPhone. Car sales zoomed ahead, as did sales of many of the items you might purchase if you were moving into a new home, like furniture, electronics and appliances.

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Existing home sales, on the other hand, seem to be slowing. Growth has been negative over the past couple of months. But, tempering that is higher prices and fairly tight inventory. Sales are at a high level, and just staying at that level, particularly when we consider that prices are rising, can power the economy higher. We won't see new home sales data, which comes from the Census Bureau rather than the National Association of Realtors, until early December.

The Fed's minutes from the October meeting were released on Wednesday, and while the Fed maintains that it will begin to taper sometime in the coming months, it wasn't exactly saying when. I've never thought that tapering was imminent, as the many "ifs" that Chairman Bernanke spoke about in his June comments suggested there was still a long way to go before tapering would take place. And don't forget that tapering is not a full stop on stimulus, but rather a slow reduction. The Fed may have its foot on the pedal now, but easing off a bit doesn't mean they are taking their foot off entirely, or slamming on the brakes. And it isn't out of the realm of possibility that if they saw signs of slowing once again they would push the pedal back down a bit.

But where's the inflation? CPI came in with a 0.1% decline in October, making the 12-month inflation rate 0.9%. The core rate, which excludes food and energy, was up 0.1% in October and is up 1.7% year over year, which is more like it, but it sure isn't the 2% or 2.5% the Fed is looking for. Producer price inflation also remains subdued. PPI declined 0.2% in October and is only up 0.3% over the past year. Core PPI is up just 1.4% on the year.

Those who predicted that quantitative easing would lead to high inflation—and in some cases hyper-inflation—may have garnered lots of headlines, but they have been far off the mark. And those who have invested on that call have almost certainly been disappointed this year. Inflation-Protected Securities is down 7.5% on the year through Thursday, and Precious Metals & Mining is down a whopping 37.2%.

Speaking of Precious Metals & Mining, on Tuesday long-time portfolio manager Graham French of M&G Investment Management announced he was stepping down from day-to-day management of the fund. Randeep Somel, who replaced Matthew Vaight as co-manager in January of this year, assumes sole management duties until a new co-manager is named. Dan and I are not overly concerned by these changes, though we don't rate the fund very highly to start with. This is the third manager change in a month or so at Vanguard, as there is some changing of the guard heading into the new year.

How would you react if you hadn't been paying lots of attention and on Saturday opened the paper and over coffee read that the Dow had dropped 1,000 points that week? From today's close, that's a mere 6.2% decline. That's not even a correction. The Dow would have to drop 1,606 points to see a typically-defined correction of 10%. The difference between where we are today and where we've been is that the numbers are getting bigger, and for some investors that might become quite scary. A 100-point drop today would be a mere 0.6% decline. Even a 500-point drop would be just 3.1%. But 500 points sure sounds scary. So, could it happen? Well, there've been 37 one-day declines of 3.1% or more over the past decade. And there have been 511 days of 0.6% declines or greater.

I'm not calling for a stock market decline today or tomorrow. The takeaway is that a Dow point today isn't what a Dow point used to be. Don't let the headlines knock you off track. Become a subscriber today to get my weekly Hotlines and monthly newsletter issues so you can invest with confidence.

Our Connected World

Since March, Vanguard investors with links between their Vanguard accounts and other, non-Vanguard bank accounts have been receiving letters updating the agreements they "signed" when they first linked their accounts together. This raised the question in some of my subscribers' minds about Vanguard's liability in the case of fraud.

First off, the new agreements don't change a thing when it comes to the question of liability. The only change is to add another one of Vanguard's corporate entities, Vanguard Marketing Corp., which is the broker/dealer for Vanguard's brokerage accounts, to the agreement. As far as I can tell, there were absolutely no changes made to the substance of the agreement.

In fact, while the legalese can be somewhat daunting, let me share with you how Vanguard's John Woerth, the head of PR, answered the question. I've bolded what I think is the most critical piece of his explanation.

"Vanguard's liability for acting upon instructions from the client to credit or debit her bank account has not changed from the prior version of the agreement. The language in the agreement solely addresses our liability when receiving instructions from the authorized client to debit or credit her linked back account. This language does not extend to actions by anyone other than the client, nor does it seek to absolve us of all responsibility for fraudulent access to a client's account."

Like many Vanguard investors, I've had my beefs with some of the ways Vanguard operates, and I've had my share of issues with its website and its "crew members." But Vanguard the entity is rock solid, and like most savvy financial firms, it would not try to shirk its responsibilities to its clients. If it's of any interest to you, I've had accounts at Vanguard for, I believe, close to three decades, and continue to believe that if there ever were fraud perpetrated upon my accounts, Vanguard would act to resolve the issues. I've certainly seen how Vanguard's biggest competitor, Fidelity, deals with the issue, since most of my private money-management clients keep their assets at Fidelity. The fund firm always, always puts the client first. I would expect the same from Vanguard.

Until next week, this is Dan Wiener wishing you a safe, sound and prosperous investment future.

signed: Daniel Wiener
Daniel P. Wiener

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