Charter Trust - Global Market Update

Why do people climb mountains? 90 years ago British climber George Mallory famously answered: “Because it’s there.” It could be for the challenge to body, mind, and spirit that mountains represent. It could be for the exercise and fresh air. Or it could be for the status.A couple of journalists have been cataloging Himalayan expeditions, and their data provide evidence that people do climb for the bragging rights. Over the years, there have been over 1000 expeditions to Everest, the world’s highest peak. The next seven highest mountains in the Himalayas—part of the prestigious “8000-meter group”—have seen an average of 260 expeditions. And the next eight-highest peaks—just below 8000 meters—have seen, on average, only 20 expeditions. The arbitrary 8000-meter threshold is a magnet for summit attempts.It may not be for bragging to others—people may just want to be able to tell themselves that they’ve reached the Earth’s highest point, or have climbed an “eight-thousander.” We’re status-seekers, and sometimes the status is internal. This has important investment implications. In the long run, finance is rational. Money doesn’t care who owns it. But in the short-run, behavior is non-rational. People buy and sell assets for all kinds of reasons, which include status.Investors need to act rationally. Bragging won’t help us reach our financial goals. “Because it’s there” may be an adequate excuse to bag a peak, but it’s not a good basis to buy a bond or stock.

Whatever happened to Fidelity? Back in the ‘70s and early ‘80s Fidelity Mutual Funds were the “it” thing, the bee’s knees, the most exciting thing to happen to investment management since the stock exchange. Magellan Fund manager Peter Lynch was a rock-star. He generated huge crowds whenever he spoke. All the hot money managers wanted to work there, and they seemed to have discovered the secret sauce of success: hire a bunch of bright, young, b-school graduates, sift them ruthlessly to find the most talented and hard-working, and reward those lucky enough to get through the meat-grinder so they would never leave. But then the music stopped. There was a scandal or two at Magellan after Lynch left, and the wind went out of the fund company’s sails. While managers like Vanguard or Blackrock or PIMCO have rocketed ahead, doubling assets and revenues over the past decade, Fidelity has been lucky to tread water. And innovation? Of the 1300 ETFs now offered to investors in the US, Fidelity manages only one. What went wrong? Partially, investment management is a dynamic, quickly-shifting business. It has always attracted talented, hard-working people. There’s no way for one firm to scoop up all the best. And any large company will eventually hire and promote a few duds along the way. Also, huge organizations often struggle when leadership is limited to a single founding family, like Fidelity’s Johnsons. They’re now passing the torch to the third generation, and that can be tricky. But maybe the internal contradictions of the mutual-fund business are part of the problem: high fees that upstarts can undercut, and a highly-regulated open-ended retail business where compliance only grows more complex and costly every year. Don’t expect Fidelity to go down in flames. They avoided the market-timing scandals a decade ago, and they still have over a trillion dollars in unlevered assets. But in an industry that celebrates the new new, this 68-year old firm can’t seem to get past its own midlife crisis. Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd direct: 603-252-6509 reception: 603-224-1350 www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

What is Bill Gates doing?By officially stepping back into an active role at the company he founded, is Gates trying to re-live his glory days? Back in the ‘90s, Microsoft was the world’s dominant software-maker. The stock was zooming. Desktop computers dominated our working lives, and we were trying to figure out how to share files with one another in things called “networks.”It was a heady time. When Microsoft released Windows 95, people camped out overnight to buy their updates. It was a cultural event. But Gates stepped down as CEO in 2000, and after the company settled its Justice department lawsuit in 2001, they missed one tech trend after another. They missed music, they missed mobile, they missed search, they missed tablets. Even though they spent billions on Zune, Bing, and Surface—who comes up with these names, by the way?—they couldn’t surf the tech waves roiling the economy.So now Gates is leaving his role as Chairman and stepping into the position of “Technology Advisor.” He shouldn’t. Big companies need singular leadership that can provide clear direction and be held accountable for results. This just muddies the waters. If new CEO Satya Nadella can’t handle the job, he shouldn’t take it.Gates isn’t Steve Jobs, Apple’s founder who was fired but then brought them back from the brink when he returned. The world has moved on. You can’t go home again. Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Are we running out of water? It’s a funny question to ask just after a storm. Here in the Northeast we’re struggling with what to do with all the frozen water crystals. Right now there’s significant snow-cover over two-thirds of the country. Some areas have well over a foot of snow on the ground, with more expected in the Northwest in the next few days. But weather isn’t climate, and some parts of the country haven’t had much snow or rain the past few years. California is especially struggling. It’s impossible to fly into the state without noting the dry rings around all the reservoirs as you come in, that show how their water levels are below normal. Mountain snowpack is about 12% of average for this time of year. Governor Jerry Brown is proposing that the State build two $15 billion 30-mile water tunnels under the river deltas east of San Francisco. But water shortages come from both supply and demand issues. We can’t control how much falls from the sky, but we can change the way we use it. California’s agriculture industry—the nation’s largest, though still only 2% of its economy—uses 80% of the State’s water. Some almond growers still flood their orchards in 100-degree heat, rather than using more efficient drip irrigation. And much of California restricts the use of genetically modified crops that use less water. When there’s scarcity, often there’s inefficient pricing. Water is essential for all life, but it’s a politically hot commodity, with prices set by committee. The recent snowfall in New England may be a hassle to deal with, but it’s nice to have the extra wet stuff around. Maybe we can figure a way to export it! Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd direct: 603-252-6509 reception: 603-224-1350 www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Why do we need regulators? Regulation is inefficient. No one hired a compliance officer to increase productivity. And regulation creates moral hazard. During the era of blue laws, the most energetic advocates for restricting alcohol sales were both Christian ministers and bootleggers. The bootleggers got more sales if legal sales were restricted.This can create opportunities for entrepreneurial types. Uber or AirBNB are taking advantage of the highly regulated taxi and hotel industries to lower consumer prices and improve profitability. By using the internet and mobile technology these startups aim to produce 90% of the output with 10% of the overhead.But local governments mistrust the upstarts: they get a lot of revenue from taxis and hotels. Also, local regulatory bodies tend to be dominated  by existing businesses that don’t want more competition. That’s one reason why florists and hairdressers can have onerous licensing requirements. Finally, there are legitimate safety concerns: we really do want inspectors to certify that the planes we fly on are safe and the hospitals we go to are healthy.As long as we have regulated markets we’ll have folks working to get around those regulations—some in order to innovate, some for more nefarious purposes. In many cases—like bitcoin—it’s a mixed bag. It takes wisdom to sort these out.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Is it worth it?That’s what I wondered when I read that Vince Young, former college football star and NFL Rookie-of-the-Year in 2006, had filed for bankruptcy. In his heydey, VY made over $50 million per year as a quarterback for the Tennessee Titans. He played in the Pro Bowl two times. And yet a massive salary and endorsement deals weren’t enough.Young is just an extreme case, but the average NFL career lasts just over three years and results in career earnings of about $4 million after taxes. Invested in a diversified, liquid portfolio, such a nest-egg could produce a sustained, growing income of only $100 to $150 thousand per year.Most of us would find it such an annuity fairly comfortable. But these athletes receive all this money when they feel invincible but are actually quite vulnerable. If they don’t spend it on a lavish, consumptive lifestyle, they invest in illiquid, concentrated ventures, like a restaurant or real-estate business—fields that are highly competitive and frequently fail. In addition, they often finish their football careers with serious injuries that make it difficult to work in a new career and leave them with big medical bills.People are social creatures. We tend to behave the way our friends do. When the culture is imprudent, it’s hard to be careful with our money.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Are the markets melting down from the bottom up? Again?Those of us who have been in the market for a couple decades may be having a sense of déjà vu. We remember this movie. In 1998 cash shortages in some emerging markets led to capital flight which led to currency issues which led to ratings problems which led to a run on the global financial infrastructure. A small hedge fund with a couple of Nobel laureates on staff had a couple trillion dollars in notional swap exposure and the Fed engineered a takeover and recapitalization of the fund by its creditors. A global financial meltdown was averted, but things were pretty hairy for a while.Are we on the same slippery slope? Cash issues in the “fragile five” emerging markets—Brazil, India, Indonesia, South Africa, and Turkey—have caused their currencies to tumble 15-20% over the past year. Credit downgrades are possible. All that’s needed is another hedge-fund levered 50-to-1 or 100-to-1 to announce that it is closing its doors and for a multi-trillion dollar bank like JP Morgan or Paribas to announce mega-losses and potential capital issues.But there’s the rub. After the 1998 crisis, loans to hedge funds saw a lot more scrutiny. During the 2008 Financial Crisis, hedge funds were hardly involved, except as profit-seeking vultures that profited from the collapse in housing prices. In addition, the ’98 crisis involved currencies that had been pegged to the Dollar, then had to abruptly break that fixed ratio. The sudden disruption to their markets and economies was as much of a problem as the change in the currencies’ level.Generals, it is said, always prepare to fight the last war. That’s why people are afraid of a real-estate bubble now, even when cash-sales predominate. Leverage is a necessary condition for a contagious bubble. When unlevered prices simply fall, they fall. Period.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Does the world need more science majors?That’s what a lot of people think. And as a science major myself, the husband of a science major, and the father of three science majors (so far), I certainly believe in the utility and importance of studying science in college. It helps young people develop many important skills.But some proposals to provide special encouragement for kids to study science seem misguided, like college-loan forgiveness or differential tuition rates. That will lead institutions to just game the system. Incentives are already out there for all to see: last year’s top-paying majors were petroleum, aerospace, and chemical engineering. The bottom-paying fields were social work, culinary arts, and child and family studies.Sometimes an industry sees a potential talent shortage and needs to take action to encourage, recruit, and retain qualified talent. Such was the case with nuclear power 20 years ago. Nuclear power wasn’t “cool”—it was where Homer Simpson worked—and its workforce was aging. But employers worked with universities, community colleges, unions, and the military to fill find good workers. Now nuclear engineering majors are also among the highest paid grads.Such micro-initiatives are generally much more successful than massive programs. Big plans require rigid rules that people can play with and distort to reclassify cooking into alimentary-engineering. Most of the money then gets eaten up by bureaucratic oversight.The marketplace knows what it needs and pays accordingly. That’s the most scientific recruitment tool there is.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Is investing just gambling? On the face of it, there are a lot of similarities. People have money left over after buying all the goods and services they need or want, and they use that money to express an opinion. In the investing world, they buy stocks or bonds—or some derivative, like ETFs or mutual funds. In the gambling world, they go to a casino or buy a ticket at the racetrack or take a position on a sports team. Now, most sports betting is just recreation—ways for fans to show their support and have a little fun. And the Super Bowl turns America into a giant sports book. Last year Nevada bookies registered almost $100 million in Super Bowl bets—and kept over $7 million for themselves. And bookies describe their job similarly to that of brokers: a little math, a lot of gut, and a premium on customer service. But the Nevada sports book is a zero-sum game: for every winner, there’s a loser—minus the bookies’ 10% “juice.” No expansion franchise ever raised capital by setting up an offering-line at Wynn Las Vegas. For all its hype, the $400 billion sports-betting business is just part of a global entertainment industry that has grown as leisure time has grown. By contrast, capital markets are a positive economic force. When new businesses go public they raise money for expansion, and a public stock price allows them to offer long-term incentives to thousands of key employees. Also, a public market for stocks and bonds allows investors to get their money out of their investments if they need it for any reason. There’s a reason why healthy financial markets are crucial to a healthy economy. Still, the thrill from a winning an NCAA bracket or a Super Bowl bet can feel like a “two-fer” in the stock market. In both cases “you pays your money and you takes your chances.” Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd direct: 603-252-6509 reception: 603-224-1350 www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

It’s the end of January and global markets are shifting.In the US and Europe, the stock markets have pulled back 2-3% after a very strong 2013. But emerging markets are down almost 10% after last year’s lackluster returns. What’s going on?When the Fed announced last June that they were ready to slow the expansion of their balance sheet, emerging markets balked. They had grown accustomed to massive cash-flows from the developed world. With the Fed signaling that the era of ultra-easy money might be ending soon, those capital inflows could slow, threatening their economies.Now the taper is happening, and some of those economies are facing a cash crunch. Argentina devalued its currency by 10%. Turkey raised its discount rate by over 4%. And emerging stock markets have sold off.But not all emerging economies are created equal. There’s a world of difference between those with a trade surplus and excess reserves—like China, Korea, and Mexico—and those that rely on imported goods and capital to keep their economies afloat—like Argentina or Ukraine. While currently a wave of “risk-off” selling seems to have depressed them all, such waves and troughs create opportunities when investors move en masse.In the long-run, quality wins. But sometimes it takes time for markets to differentiate between fool’s gold and the real thing.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Why do good intentions so often fail? It happens all-too-often. A new approach to poverty is announced, there’s excitement, there’s publicity, tens—no, hundreds of millions of dollars are raised, and it’s declared that the end of poverty is in sight. Such hope! Such vision! But when plans hit the ground, things are more complicated, systems collide with systems, and often people end up worse than they were before any of this help ever arrived. Some development experts went to Africa looking for “quick wins”: innovations that could dramatically improve people’s lives. One idea was to give people fertilizer so they could produce more food on their farms to reduce malnutrition. Bang, the villages they worked with grew so much corn they had a surplus—yields tripled. But then a funny thing happened. The roads were so poor the surplus couldn’t be marketed. So some farmers discarded their surplus, but then rats arrived. In the end, most of the growers sold their corn for less than it cost to produce it. This is the tragedy of development. Plans look good on paper, but the world is more complex than we think. People resist change, sometimes for bad reasons, but sometimes for good ones. Self-help, micro-enterprise, and small, sustainable solutions are possible, but we need to be humble. Africa’s landscape is littered with rusted tractors, broken water pumps, and neonatal incubators that can’t be plugged in because there’s no power. Good intentions fail when big money funds grandiose plans with no accountability. Small initiatives grown little-by-little do better. Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd direct: 603-252-6509 reception: 603-224-1350 www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Why is it so hard to fill this job?In August Steve Ballmer announced that he would resign as Microsoft’s Chief Executive. Since then the stock has rallied 20%, mainly on hopes that a new CEO could turn things around. During his time as CEO, sales tripled and earnings rose 16% per year. But the company missed all the major innovations: search, social, and mobile, while issuing disastrous Windows updates. So the stock has languished. Only after his resignation was released did the shares show any sign of life.So why is it taking so long to find a successor? Five months is a long time for big company to be in leadership limbo. It can’t be the pay: he made $1.3 million last year. And the potential for a turnaround is significant. Surely someone could put Microsoft’s $28 billion in operating cash flow to work profitably. But a specter haunts Microsoft: its founder and Board Chairman Bill Gates.Gates is leading the search for a new CEO. He leads a weak Board filled with people who used to have tech credentials. He facilitated Microsoft’s of new tech trends. He’s still the name most folks associate with Microsoft. And he’s the reason the company has founder’s fever—the malady that can afflict once-great organizations when times have moved on but the original leader won’t. He still has his partisans and loyalists, and they’re poisonous.Apple has this advantage over Microsoft. Steve Jobs is gone. If Microsoft wants a strong leader to take it in a new direction, Gates has to get out of the way.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Are people overconfident? Studies published over the years demonstrate that people overestimate their abilities and potential for reaching their goals. Julie Andrews illustrated this 55 years ago when she sang “I have confidence.” The ironic point the song makes is that her (over)confidence is misplaced. She had very little reason to expect everything to “turn out fine” given the circumstances she was facing.It’s easy to see how people are overconfident today. Just ask a room full of people to raise their hands if their driving is above average. About 90% of people raise their hands. Of course, it’s mathematically impossible for 90% of people to be above average. We don’t live in Lake Wobegon.Our overconfidence affects us financially as well. People under-save and over-consume, figuring everything will turn out fine. Some people over-trade their investment portfolios, chasing hot ideas and suffering when these fail to live up to the hype. But more common is intense inactivity. An analysis of 1.2 million 401(k) investors revealed that over 80% of investors did nothing over a two-year period, and an additional 11% made only one transaction.At a minimum, people should review and rebalance their portfolios annually, especially when their life-circumstances change: marriage, having kids, retirement, and so on. There’s nothing to save us from our own financial mistakes. The most common mistake is making no decisions at all.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

What are we going to do with all our debt?Since 1950 private debt as a percentage of the economy has grown from 50% to about 160% of the world’s 22 most advanced economies. The ratio had been steadily advancing for years, but accelerated between 1998 and 2008, when it grew from 100% to 170%. It has retreated modestly since the financial crisis, as corporations and consumers have delevered.This is a global phenomenon; no single government is responsible. The debt has grown as global commerce has grown. In the late ‘90s there was dramatic increase in trade along with technological improvements in finance that encouraged credit to grow faster than the economy. (As an aside, in 1998 Long Term Capital almost destroyed the world’s stock and bond markets).The level of debt is an issue because it makes everything more fragile. Legitimate businesses can become insolvent and entire economies can experience debt-deflation when leverage is excessive. There are basically four ways to reduce debt relative to the economy: growth, austerity, default, inflation, or some combination.None of these are popular. One might think growth would be, but the economic liberalization necessary to increase growth significantly requires a political consensus that is rare. After World War I, a lot of countries simply defaulted on their debt.For now, it looks like the world is rationally headed towards a combination of growth and austerity. But nothing is certain.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Do managers matter? That’s what I wondered when I read that Mohamed El-Erian, CEO and co-CIO of the Pacific Investment Management Company—PIMCO—is resigning. PIMCO is the largest bond manager in the world, and one of the most successful asset managers of all time, with almost $2 trillion in assets. Their flagship total return bond mutual fund has over $200 billion.Some have linked El-Erian’s resignation to the $40 billion in outflows from the bond fund last year, or the difficulty that PIMCO has had in diversifying its business model by providing equity-oriented funds. But that’s just silly. A massively successful manager doesn’t get the boot just because he had a bad year, or a difficult initiative. Under El-Erian, the firm more than tripled its size. El-Erian has taken time off before. He left PIMCO in 2005 to run Harvard University’s endowment, then returned in 2007. Harvard needed a high-profile manager after compensation disputes gutted its endowment management team. It’s far more likely that Mohamed has another public-service initiative in mind. He’s the son of an Egyptian diplomat who’s fluent in English, French and Arabic. Egypt could certainly use his expertise, and he’s indicated before that he’d like to serve that country in some way.In any case, PIMCO is unlikely to suffer greatly because of his departure. Founder and co-CIO Bill Gross is still around, with his “batteries 110% charged and ready to go another 40 years” as he tweeted yesterday, and the company has a deep bench of manager talent.But one thing’s certain: El-Erian’s star isn’t fading.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net