Charter Trust - Global Market Update

Is the EPA going to play Scrooge?A team of researchers at the Oregon State University has noted that with all the concern about the effect of carbon emissions on the global climate, a major greenhouse gas is being overlooked: methane. And methane is over 20-times more powerful than carbon dioxide in trapping heat.Cows, sheep, goats, and other ruminants produce tons of methane in their digestive systems. Over the past 50 years the population of these animals has risen from 2.4 to 3.6 billion animals. Reducing demand for ruminant products could help achieve substantial greenhouse gas reductions.An important—though unusual--use for ruminants in today’s economy is transportation. One northern-latitude animal crucial to global commerce at this time of year is the reindeer. They provide critical transportation services for specialized delivery vehicles in high demand during late December. Their methane emissions occur in the stratosphere, so their activity could be restricted in the next round of global climate change negotiations.The reindeer herds need a special exemption if Christmas gifts are to arrive on time. Pigs and poultry may be able to produce meat, but they can’t replace Rudolf when it comes to lighting the way for Santa’s sleigh.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

Happy Birthday, Federal Reserve!100 years ago Woodrow Wilson signed the Federal Reserve Act, the culmination of a legislative effort that began seven years earlier. In 1906 the San Francisco earthquake had far-reaching effects. Insurance payments from London insurers were massive, and money was in short supply. Interest rates soared, and a monetary panic ensued. Stock markets collapsed. The panic didn’t end until J.P. Morgan famously locked 40 top banking officials in his library on a Saturday night and didn’t let them out until they reached an agreement to shore up shore up the banking system the following morning.The Panic of 1907 led to a huge recession, and the Chairman of the Senate Finance Committee thought it was a bad idea for the US banking system to depend on the financial acumen and personal resources of one man—who reportedly worked two hours a day and often could not be reached as he travelled in Europe. Nelson Aldrich lead a commission that studied banking systems around the world, and concluded that the US needed a central bank, something it had not had since 1836.In order to avoid concentrating too much power, Congress adopted a plan that created 12 regional banks, governed by public officials, bankers, and business leaders. This hybrid system became the lender of last resort, that could lend freely to member institutions. It didn’t end the occurrence of financial panics, but it did give policy makers a better tool to deal with them. Before long, the Dollar supplanted the Pound as the world’s reserve currency.So Happy Birthday, Fed. And many happy returns.\!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

Looks like Target is getting a big lump of coal in its stocking this Christmas.The big-box retailer disclosed yesterday that some 40 million credit and debit-card accounts had been compromised in a data breach that ran from November 27th until December 15th. Apart from jokes about “don’t be a Target” for cyber-crime and their having their logo—the big, red bull’s-eye—painted on their corporate backs, what can we learn from this?First, technology is vulnerable to fraud and abuse—especially outdated technology. Charge-cards are the worst: a static, unchanging number that stays with the card and has no natural way to verify that the person making the charge is authorized to do so. Improved security methods have been around for a while: smart-cards with embedded chips that create unique transaction numbers; biometric identification that uses a fingerprint; and pass-phrase confirmation--combining something you have, something you are, and something you know to authorize a purchase.But advanced technology is also running against the disturbing, surveillance culture that has grown out of our high-speed , always-on, everywhere online society. It creeps people out to think that their music downloads, restaurant purchases, and library borrowings can be accessed by the NSA, KGB, or Google. And Target’s data-breach just reinforces these two conflicting trends.For now, Target’s new motto should be changed to “Expect more, pay less, and bring cash.”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 America run on Christmas? Christmas is the retail event of the year. Stores begin stocking up in September, finalizing marketing plans in October, and the period from Thanksgiving to Christmas is one nonstop retail rush to electronics stores and grocery stores and clothing stores and big-box retailers. It’s common knowledge that 70% of America’s economy is driven by consumer demand, and that about half the economy is related to retail and wholesale trade. With anywhere from a third to a half of all sales stemming from the holidays, the gift-giving season has become an essential part of our economic landscape. And yet there are always Grinch-like economists who remind us that many people prefer a check to ill-fitting sweaters, that most toddlers like the boxes toys come in better than the toys themselves, that charities often do better with cash donations than canned goods, and that Amazon is making brick-and-mortar stores obsolete. As long as we’ve exchanged presents there have been admonitions not to let the season become too commercial. Indeed, that’s the central message of the classic Grinch and Charlie Brown Christmas stories. And it’s a good message. But gift-giving often isn’t just about the item. It’s about participation in each other’s lives—in a family, in a workplace, in a community. That involvement may be inefficient, but there’s more to life than getting more done. Gift-giving may not be productive, but it lets us share our joy. And that’s good for everyone. 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’s wrong our public pensions? On the face of it, the promises are too big and the funds are too small. We’ve underfunded our pensions because contributing a dollar today requires taxes today, taxes that have to be approved by politicians who can be punished at the ballot box. At the same time, pension benefits promise a dollar tomorrow, dollars that earn worker loyalty and union support today. A tax today is penalized; a future payment is rewarded.But it goes deeper. There’s a deeply corrupt public pension culture  in which audits are scarce, board members owe seats to politicians—politicians who receive political contributions from those who directly benefit from the system—retirees, unions, consultants, and investment managers. Those board members are rarely investment or actuarial experts themselves; instead they rely consultants who charge fat fees to give plain-vanilla advice that comports with the wishes of the most powerful pols.In order to supplement the budget, public pensions act as a private piggy-bank for stealth borrowing. And multi-billion dollar pension funds are awfully tempting targets. Underfunding thrives in a place that tolerates corruption. The solution is a culture of accountability and transparency that punishes covering up. Sunlight is the best disinfectant.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

Loehmann’s is filing for bankruptcy. Are the bad times coming back? Probably not. While the 92-year old New York discount clothing chain is an icon in the Northeast, it has been a regular visitor to the bankruptcy court. They might even want to get a frequent-filer card. The firm filed Chapter 11twice before: in  1999 and 2010. It’s hard for small chains—Loehmann’s has just 39 stores—to keep up with behemoths like Target or TJX, which has 3200 stores. In addition, lots of retailers have struggled—like Sears, JC Penney, and Gap. Indeed, some of these chains wouldn’t still be around if it hadn’t been for the Fed’s ultra-low interest rate policy. Rates have been so low for so long that these firms have been able to secure financing even though their sales have been flagging. Sears used to have a 3% market share as recently as 2005—now it’s down to less than 2%. But the firm was able to get a $1 billion loan in October to help restructure its business. In addition, bankruptcy is a lagging indicator. It takes years for a company to run out of cash, and since management is frequently replaced in a reorganization when the equity is wiped out, it’s usually the last resort as debt-holders sue to get their money back. And the number of business and non-business filings has fallen every year since it peaked in 2009. It’ s now 20% below its high. Bankruptcy is how the system tells a business that what it’s doing isn’t working. It’s how our economy evolves. Just because an iconic company goes down doesn’t mean we’re going backwards. 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

Are our employers responsible when we mess up? That’s the question before the Supreme Court in a dispute between Fifth Third Bank and some of its employees. The workers invested in the company’s 401(k) program. Like many companies, Fifth Third had lots of options—stocks, bonds, cash, and company stock. During the Financial Crisis, Fifth Third’s stock fell 97%--from $40 per share in June of 2007 to a dollar in February of 2009. Since then, the stock has come back about half way, to $20.Fifth Third’s story isn’t unlike that of many banks during the crisis. Loans went south when the housing bubble burst, and banks that focused on mortgage-lending were in deep trouble. Some were wiped out. Key Bank, Sun Trust, Zion National, Regions Financial—all had their stock fall to almost nothing and then come gradually back. Fifth Third’s situation was made worse by its Ohio base, in the heart of the auto-country.Lots of people invest in their own company’s stock as one of their choices when deciding what to do with their retirement savings. After all, doesn’t it make sense to “invest in yourself?” But Fifth Third was and is a $110+ billion bank with diverse businesses subject to economic, financial, competitive, and regulatory risks. In this case the employees claim that the bank should have stopped offering its stock as an option. Any reasonable administrator would have done so, they say, since the stock was falling like a rock. But the bank claims it wasn’t in dire straits. The market was in a panic, but the bank had reserves and contingency plans. In the end, they borrowed $3½ billion in TARP funds, which they later paid back.401(k) plans give us the ability to take our retirement savings with us if we move from job to job. In exchange, we need to take responsibility for how much we save and what we invest in. That’s the deal. Sometimes our choices go bad. As my high-school German teacher used to say, “We grow too soon old, and too late smart.”: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 do you think the market will do? I get that question all the time, especially this time of year. And it’s reasonable to ask someone who makes his living dealing with the ups and downs of the Dow and interest rates whether he thinks next year’s markets will behave like Santa Clause or the Grinch. In the long-run, markets are moderately predictable. Bonds are actually very predictable. If you buy a 10-year Treasury bond at a yield to maturity of 2.9%, you can confidently expect that you will receive about 30% over 10 years. (That extra 1% is due to reinvesting the coupon payment.) Low yields lead to low returns. Conversely, high yields lead to high returns. How about stocks? The data is less decisive, but still indicates that valuation matters. Cyclically adjusted earnings yield is positively associated with returns—especially when the market is at an extreme—as it was in 2009 or 2007. But even in times of normal valuation—which is what I would maintain we are in right now—there’s a positive correlation. But the data is messy. Equities are a residual claim on a volatile earning stream, and subject to manias and panics. Still, low valuations lead to higher returns, and vice-versa, over the medium to long run. But what do I think the market will do next year? Short-term data are much less dependable. Stay diversified! Diversification is the compliment that humility pays to uncertainty. We don’t know the future. We can only plan for volatility. 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

Will the Volker Rule take down financial stocks?The limits on proprietary trading that are part of the Dodd-Frank act are supposed to make banks safer. Big banks often run several businesses. They have their traditional deposit-and-loan business, intermediating funds between savers and borrowers, and they often have a financial broker-dealer business, providing investment products for their wealthier clients. Twenty-one banks are designated as Primary Dealers, participating directly in the Treasury Department’s periodic auctions of government debt.As dealers, the banks have a responsibility to make markets in the securities they sell, providing liquidity so that if a customer needs to buy or sell a bond between when it is issued and when it matures, he can. That liquidity is important. If investments weren’t liquid, the cost of capital would be a lot higher.But there’s a fuzzy line between making markets and taking positions. Trading desks are expected to be profit-centers, not just order-takers. Banks invest a lot of capital in their trading operations—terminals, news-feeds, cookie-carts—and they expect a return. The Volker Rule is an attempt to limit how much banks trade for their own accounts, as opposed to providing liquidity for their clients. But it’s complicated: the rule is 71 pages long, with 892 pages of explanations.At its heart, the Volker Rule will be a multi-layered computer algorithm that big banks will manipulate in order to game the system. Successful traders stymied by regulations will set up their own proprietary funds, as they always have. Byzantine rules rarely have long shelf lives, and the financial sector is evolving rapidly. Unless the rule is regularly amended, it’s unlikely to keep up with the marketplace.The Volker Rule won’t change much because it tries to out-complicate our complicated banks. In the struggle of big versus safe, complexity favors the big.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

Has the Fed lost its way? The Federal Reserve System celebrates its 100th birthday this year. Rather than hold a self-congratulatory party, the Philadelphia Fed convened a policy forum that looked at current policy in an historical context, asking what the Fed is doing wrong and whether it is straying from established principles of sound central banking. While there was some criticism of the Fed’s role in the Financial Crisis and evocations of Walter Bagehot, the focus was more on what the Fed is doing now—particularly on Quantitative Easing and asset purchases. While QE1 succeeded in shoring up the economy, it’s unclear whether QE2 and QE3 have accomplished much beyond expanding the Fed’s balance sheet. Inflation seems tame, but a review of the ‘60s and ‘70s is cautionary: in 1970 inflation appeared low and the Fed became highly stimulative—just on the eve double-digit price rises. Going forward, the Fed is likely to reduce its asset purchases and rely more on forward-looking communications. But transparency is not a panacea: economic conditions are bound to be more complex than we think, and too-frequent communication and revision can confuse rather than clarify. As long as we use money, monetary policy will be controversial. Serious self-criticism is a hopeful sign that we won’t simply repeat the mistakes of the past.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 Microsoft making a comeback? Ever since Steve Ballmer quit the stock has been rallying. Many investors are encouraged by its focus on business solutions and “cloud” applications. But it’s still facing the same competitive landscape: an internet juggernaut—Google—and a host of disruptive devices at Apple. And the recent rally by Microsoft, Apple, and Google are driving the Nasdaq to new highs. But it was only 15 years ago that Apple went cap-in-hand to Microsoft for a $150 million lifeline. With stable funding Steve Jobs was able to stabilize his Mac sales and go on to introduce the iPod, iTunes, iPhone, and iPad, sending waves of creative disruption through the music, travel, publishing, telephone, and of course PC businesses. At the time of the deal, Apple was worth $3 billion and Microsoft $500 billion. Now Microsoft has fallen to $300 billion and Apple is worth $500 billion. Jonah swallowed the whale. At the time, Microsoft was keeping Apple’s operating system viable so the folks at the US Justice Department would have a harder time proving Microsoft’s monopoly. Bill Gates was propping up what looked like a permanent basket-case. It seemed like a brilliantly proactive legal move. What could go wrong? It’s all a reminder of how quickly things change. We like to invest for the long-term, but sometimes, a few years can seem like a lifetime. 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 a “living” wage?It seems reasonable that anyone working full-time should be above the poverty-line. For a family of four, that would be $23,550. Which, if supported by a single wage-earner, would require a minimum wage of $11.78 per hour. While that would be a significant increase from the current Federal minimum of $7.25, it’s not that far from some proposals.But when Amazon is proposing to deliver packages by drone, raising the minimum wage seems misguided. While many service-sector jobs can’t be outsourced to lower-wage countries, they can be replaced by robots. Tablets can replace waiters and waitresses at restaurants; self-driving trucks can replace driver-operated vehicles, especially at work-sites; autopilots already do most of the flying on airlines. Most businesses struggle to remain profitable; the more expensive labor is, the more attractive automation becomes.And a more productive society is a wealthier society. Doing more with less means that the work that remains will be less mindless and more meaningful. That’s not to say that the transition won’t be painful. Getting the young and poor into the job market is a vital policy challenge. I don’t know what the solution is, but I’m pretty sure that raising the cost of labor isn’t it.Maybe the answer will come when robots can replace politicians.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

On the same day that we were treated to the details of petty financial forgeries in the Madoff case and insider soap-operas at SAC capital—we also learned that a great man—Nelson Mandela—had passed away.Nelson Mandela worked in the ranks of the African National Congress while free and from prison during its fight against apartheid. The ANC was supported by the Soviets at that time and was regarded with suspicion by many in the West. But when Mandela was released in 1990—shortly after the Berlin Wall fell—he embraced reconciliation rather than reprisal. Elected as President in 1994, he served one term and walked away from power in 1999—something revolutionary leaders almost never do.He left office and retired—refusing to travel the world or seek out the limelight. His abiding legacy was the elevation of law over vengeance. His Truth and Reconciliation Commission brought out the truth, but avoided a bloody civil war. Mandela even spoke of some of the white guards from his 26 years in prison as his friends.The contrast between his inspiring example and the insipid banality of the Madoff and SAC conspirators is instructive: greatness isn’t measured by the size of your wallet, but of your soul.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

They were the best of schools, they were the worst of schools. Once again an international testing body has evaluated 15-year olds around the world in math, science, and reading and once again the US has come out below average. If an aggressive foreign power did this to our schools, the saying goes, it would be considered an act of war. But people need to stop hyperventilating about tests and ranking. The experts sound like a bunch of preppies obsessing about their SAT scores. It’s hard to draw conclusions from aggregate scores when US school system is so diverse. Hidden in plain sight, though, is some interesting data. Finland does very well on these tests—it’s been written about as an exemplar of educational excellence. But right next door, Sweden does horribly: the worst in Europe. Both countries have similar cultures, similar climates, and have diversified, industrial economies. But Sweden’s workers are far more productive than Finland’s, and its students are far happier. Now maybe they’re just happy because have sports teams and they don’t have as much math homework. But the engineers at Eriksson and Nokia get all the math the need. Test scores don’t predict productivity. Most US schools do pretty well at imparting the basics and getting kids to learn. Parents who want more hire tutors, send their kids to private school, or homeschool. Our children may not all be above average, but the kids are all right. 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

Is the world going sane? The Federal judge in Detroit’s bankruptcy case ruled that pension rights are contract rights. The legislature in Illinois just passed a mega pension reform. What’s next? Congress reforming Social Security?It’s no secret that the US has a pension problem. Under current law, States and cities have underfunded their retirement benefits by about $700 billion, by some estimates. New Hampshire’s gap alone is $3.2 billion, bigger than Minnesota’s. And pension obligations are at the heart of Detroit’s bankruptcy filing. The City is$18 billion in debt—most of which are pensions. While the average pension is modest, there’s $25,000 in debt per resident—too much!But the bulk of the problem isn’t current payments, it’s future liabilities. Since pensions can now be negotiated, the judge ruled that the Michigan constitution—which protects pensions, as does Illinois’—is not a financial suicide pact. There’s no reasonable way for the city to dig its way out of the hole it is in. Bankruptcy is the only option.And Illinois seems to have seen the light on pensions, too—or at least, a glimmer. If it survives its own court challenge, the reform will go a long way towards reducing the State’s $83 billion unfunded liability—the worst in the nation.With all this good news breaking out, I’m feeling lucky. Maybe I should go buy a lottery ticket. Or some Detroit bonds—which could be considered the same 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