Crecencio Part 2

Got to thinking more about that Wal-Mart story: Here's a snippet from the IBT article:

Incidentally, it would take the average worker around 750 years to earn the $23.2 million that CEO Mike Duke earned in 2012, approximately 1,034 times more than the company’s average worker.

I suspect that Crecencio suspects that our household income is higher by some multiple than his. And I suspect his employees suspect that his is some multiple higher than theirs'. I don't suspect, however, that Crecencio nor his workers resent the signers of their paychecks good fortune. Of course the multiple in either instance comes nowhere near 1,034 times. Then again, neither Crecencio nor myself possess the skills to manage the largest distributor of low-cost consumer goods (and, btw, the largest single employer) on the planet. That job is reserved for the rarest and, therefore, the highest paid talent.

Speaking of high-paid talent, according to Forbes, Steve Jobs's average yearly income from 2002 to 2007 was $130 million. That would be 3,250 times the average pay of today's Apple Store genius---and, by the way, many many times more than yours truly's. Which doesn't bother me in the least, as I type this on my iPhone while waiting in the car for my wife while she patronizes Bed Bath and Beyond---a retailer (not nearly the largest on the planet mind you) that paid its CEO, a rare talent for sure, $5.5 million more than Wal-Mart paid its last year.

Crecnecio is working today...

Last night my wife and I drove past our local Wal-Mart store; its huge parking lot was packed. We didn't happen to notice (we were a ways away) any picketers. If there were any, it was nothing like the scene pictured in this International Business Times article. "I want to work full time", "Wal-Mart Always Low Wages", "Stop Cutting Hours" and "Stand Up Live Better" were the slogans I could make out in the picture.

The din of the leaf blower outside our front door poses a little distraction as I effort to articulate this morning's message---our yard guy is working today. I haven't bothered to calculate what we pay Crecencio by the hour, but apparently it's as much or more than he would receive by bumping us for another customer. Surely, if he is underpaid he would approach me, make his demand and, depending on my response, either keep me on or move on to the opportunity that signaled him that there's more to be made elsewhere. The last thing in the world Crecencio would do---regardless of his estimation of our annual income---is publicly protest the Mazorra family's stinginess.

The fact that some of Wal-Mart's employees are choosing to demonstrate tells you that Wal-Mart pays a very competitive wage for low-skilled work. The folks dawning the aforementioned slogans are receiving the best the marketplace has to offer for their skill-set (otherwise they'd be working elsewhere). If they're to improve their lot, they'll produce stand-out work---and thus work their way up Wal-Mart's ladder---or devote their time off to learning the skills that would one day garner them better wages with another employer. Publicly complaining---in a personal plea or at the behest of a union---is clearly not a productive use of their spare time.

Give thanks for what you hold most dear, and the conveniences that make it easy....

"Forever on Thanksgiving Day
The heart will find the pathway home."
Wilbur D. Nesbit

The poet indeed captured the essence of this day. It's all about home and celebrating the love of family---Thanksgiving Day is beautifully simple.

Beautifully simple, that is, until we stop and consider the miracle of the marketplace. The system that somehow delivers the basic amenities we so readily take for granted---the conveniences that allow us to relax and celebrate the things we hold most dear.

Take, for example, the turkey; how does that happen? Where the heck do all those birds come from? There has to be millions of them brought to market. That's right, and the operative word there is "market"---the place where people exploit their property rights and pursue their own objectives. Thank goodness they do!

A virtually uncountable number of profit-pursuing folks, most remaining strangers to one another, organized to bring you today's main course: From the land owner to the fertilizer producer to the farm equipment maker to the fuel provider to the feed farmer to the turkey farmer to the turkey processor to the freezer manufacturer to the truck manufacturer to the trucking company to the grocery store (and, yes, I skipped myriad relationships in between). And of course all the workers who freely bargain the terms of their production, their labor, with the individuals who, while focusing merely on their respective specialties, miraculously got that butterball rolling. Not to mention the cranberries, the cranberry sauce, the potatoes, the gravy, every ingredient in the stuffing, the pies, the pie pans, the plates, the utensils, your kitchen appliances, your fuzzy slippers, the thread that holds your fuzzy slippers together, the thin rubber soles of your fuzzy slippers, the etc, etc, etc, etc, ad infinitum... As Adam Smith put it:

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."

HAPPY THANKSGIVING TO YOU AND YOURS!!

This is the world we live in: 

A 0% return can be a beautiful thing...

Those who track mutual fund investment flows tell us that, based on flows out of bond funds and into stock funds, the individual investor is beginning to join the party---although just barely beginning. In terms of market implications, the "just barely" part is music to the bulls' ears. There's this widely-held view---one I sympathize with---that heavy retail (individual investor) participation is a classic warning sign that the party's nearing its end. But, honestly, that's not what troubles me most about individuals reallocating their long-term money. What troubles me is the switching from fixed income assets to equities, when it's done for reasons other than periodic rebalancing.

I've maintained, for an embarrassingly (in that I've been wrong till recently) long time, that bonds are no place to be when interest rates are at record lows. One of the few things we know for sure about markets is that when interest rates rise bond prices fall (we just don't know how long interest rates will stay low [or how long the Fed can successfully keep them low]). Hence, my concern for the individual investor who tracks the track records displayed on his quarterly 401(k) statement. When the government bond fund that served him so well after the drubbing he endured in 2008 delivers a negative 4% year-to-date return, and the U.S. equity fund posts a 25% gain, he can't help but wonder if a change is in order.

While I entirely understand how the individual investor with a day job can come to that wonder, I'm less understanding of investment advisors, Princeton professors and best-selling authors who suffer the same temptations. In a recent CNBC interview, Burt Malkiel (he's all three rolled into one) offers an alternative allocation for those who've stuck with the traditional 60% stocks/40% bonds mix to this point. While he and I are on the same page when it comes to bonds, we go to entirely different places when it comes to what to do instead. He recommends the following: 

55.0% Stocks
27.5% Dividend growth stocks, emerging market bonds and tax-exempt bonds
12.5% Real Estate Investment Trusts (REITs)
05.0% Cash

That, in my view, is in no way a reasonable alternative for investors who wish to maintain a moderate risk profile. It's like taking what was a traditional bond allocation (the 40%) from the frying pan and throwing it into the proverbial fire.

Here's how those "bond substitutes" performed (according to Morningstar) during a recent period of rising interest rates (5/22/13 - 6/30/13):

Dividend stocks (S&P 500 Dividend TR Index): -12%
Emerging market bonds (BofA ML Glbl Emerg Mkt Credit Index): -4%
Tax-exempt bonds (S&P Muni Yield TR): -5%
REITs (MSCI U.S. REIT PR Index): -12%

And here's how the remaining two asset classes performed during the same period:

Stocks (S&P 500 TR Index): -4%
Cash: 0%

Ironically, during that brief period, three of the four asset classes replacing the conservative allocation declined further than the not-conservative allocation.

As you can plainly see, trading bonds for other interest rate sensitive asset classes in no way mitigates potential risk. In fact, when you consider the economic (and business) risks inherent in stocks, real estate and emerging markets, it exacerbates it.

Here's my suggestion:

60% Stocks (diversified globally and across sectors)
40% Simple, safe, CASH

Rest assured, there will come a day when bonds once again make perfect sense. In the meantime, a zero rate of return (on the "safe" part of your portfolio) is a beautiful thing.

Today's TV Segment (video)

This morning's conversation with Zara was purposely short on market outlook and long on practical advice to the individual investor. Click here to view...

Bring us your huddled masses, and their dollars...

Does it bug you (as it does a lot of Americans) that Americans buy substantially more stuff from the Chinese than the Chinese buy from Americans? And how does that happen? If we spend, say, $40 billion in a month on China-made stuff, and they only spend $10 billion on U.S.-made stuff, what are they doing with their leftover $30 billion? Well, as you may know, they buy lots of U.S. treasury bonds, but that's not all---they also invest in U.S. assets. Back in June, I wrote about the good fortune that trade with China brought to the owners of a hog farm in Virginia. Here's that brief essay:

Worried about the dollar? Worried about jobs? Worried about national security? Well then, you should feel very very good about a Chinese company buying Smithfield foods. Counterintuitive? Perhaps for some, but I’m hoping not so for my regular readers.

Here’s a little refresher course:

The dollar: China goes to great lengths to compete for our business—making us wealthier in the process (we enjoy more of life’s amenities as the world competes on price for our business)—because they love U.S. dollars. They love U.S. dollars because we apparently yet produce goods (like hogs) and services they deem valuable. The Smithfield Foods acquisition proves it. Thank goodness we have more than just federal debt to offer the world.

Jobs: Trust me, Chinese management and workers are not about to descend upon tiny Smithfield, Virginia. Shaunghui bought Smithfield Foods to exploit, and export (or import), its business model (along with its hogs). But we’re not talking merely the preservation of Smithfield jobs, we’re talking $4.7 billion U.S. dollars (a few of them you sent to China to buy the monitor, tablet, or cell phone you’re staring at right now*) flowing back to the U.S. You think Smithfield’s largest shareholders might be looking to grow other successful enterprises with their proceeds — creating jobs in the process? Yyyyep!

(So the next time you cringe before buying an item made in China, remember all those U.S. jobs you helped create when Shaunghui bought Smithfield Foods.)

Worried about national security? This one’s the easiest: Nobody ever shoots their customer (or supplier). Or, as an intuitive individual (most often ascribed to Frederic Bastiat) once said:

“If goods don’t cross borders, soldiers will.”

Today's post was inspired by This CNBC video on the benefits of trade bestowed onto California home-sellers. 

Here's economist Scott Sumner on the same thing going on in Australia:

Chinese are snapping up a lot of properties in Sydney. Aussie labor is employed building houses. The houses are traded for Chinese goods. The only special feature is that the houses don't physically leave Australia. Chalk up one more reason why current account deficits are an utterly meaningless number.

Have a Healthy Thanksgiving...

Dang! I'm running out of market stuff to write about. I've already told you that valuations, while no longer cheap in my view, look okay (some sectors more okay than others). That there's enough bearishness out there to probably support the market's upward momentum (at least for the moment). That the notion that a knockout punch will ultimately come from the Fed tapering QE has become too anticipated to come true: As S&P's Sam Stovall puts it "A boxer is rarely felled by the punch he expects." So I guess today's message is simply about you relaxing and enjoying the season. The market looks to bring you holiday cheer and a happy ringing in of the new year.

Relieved? Since you were thinking the Dow's been floating in some pretty thin air up there at 16,000. That the walls of that balloon have---sooner or later---got to give way to the pressure at that altitude. And of course the last thing you want to see is a big market correction hitting your monthly statement this time of year. You like the market calm. Is that a fair assessment?

Well, shoot, if you can indeed relate to the above you're either not reading, or not believing, my stuff. You see, my friend, there is no such thing as a calm market. In fact I would argue that when the action is light, the uncertainty is palpable. If the players all believed that the market will ride the currents higher into 2014---with little turbulence---believe me, the Dow wouldn't have risen 7.77 points today, it'd be up 777. Conversely, if the players were certain there's a coming shoe to drop that would drop the bottom out of the market, well, the bottom would be dropping as I type. Clearly, at this juncture, there is little conviction one way or the other.

But that's not at all my concern. My concern is that you can relate to paragraph two. That maybe your holiday season could be less cheerful amid a falling stock market. That while you probably get, intellectually, that corrections---and bear markets---are essential to the long-term success of your portfolio, it's a different story emotionally. But that (your emotional ties to the market) is simply not healthy, at so many levels. Seriously, we in no way want the market rising in perpetuity. Why? Because that is pure fantasy. All things are cyclical: Imagine the Earth without rain---that would be the market without corrections. And, more importantly, the chemicals released by negative emotions don't mix well with cranberry sauce and turkey gravy in the tummy.

So, please, forget about the market---and go have yourself a happy and emotionally-healthy Thanksgiving!