Greek Financial Crisis- Nothing New

GreeceGlobal stock markets fell sharply Monday. Investors don’t like uncertainty and that’s what this latest Greek financial crisis is providing. Can they avoid a full-blown default? Will there be a ‘Grexit’? Will it stay in the euro zone and keep the single currency?

The current Greek crisis has had many deadlines that have come and gone without any changes. Today, Greece is due to make a payment of $1.7 billion to the IMF for partial repayment of a bailout agreed to in February 2012. This Sunday, the people of Greece will vote on a referendum to accept or reject the austerity measures demanded by its creditors in exchange for further aid. Prime Minister Alexis Tsipras has encouraged the populace to vote “no” in order, he thinks, to try to negotiate a better deal with the country’s lenders. On July 20th, there is a $4 billion payment owed the ECB and then August 20th another $3.6 billion due the ECB. It will likely be a tumultuous next seven weeks for Greece and its citizens.

This is nothing new for Greece. Depending on your chosen starting point, this is year five or year 2600 of the Greek financial crisis.

  • Ancient Greece invented finance including banking, personal loans, capital levies and annuities. Back in the 6th century BC, according to Josh Brown in The Reformed Broker, they also invented the first financial crisis in recorded history. Greek citizens, en masse, had pledged themselves as slaves as collateral for debts they took out against their farms. Ultimately, much of the population was enslaved, both in the country or shipped abroad. The wiseman Solon solved the crisis by freeing his fellow countrymen from slavery by devaluing the drachma by one-quarter.
  • The banks of the day, which were the temples, generally did not lend to the city-states. However, the Shrine at Delphi and its Temple of Delphi made 4th Century BC loans to 13 Greek city-states and ended up taking an 80% “haircut” when the majority of them never paid back their loans.
  • Since Greece obtained its independence in the 1820s, it has been in default to its creditors roughly 90 of those years; about half. They defaulted in 1826, 1843, 1860, 1894 and 1932. In the late 1800s, the Greeks once again ended up under an unsustainable debt burden and the government suspended all payments on external debt in 1893. At that time, they created the “International Committee for Greek Debt Management” to appease foreign creditors. Sound familiar?
  • There are no countries in the modern world that have defaulted on their loans more often than Greece, except for Honduras and Ecuador.
  • The current financial drama began in December 2009, when credit rating agencies first downgraded Greek debt. Then, in May, 2010, there was a $146 billion rescue package loan, tied to a severe austerity requirement. The austerity program and rescue package failed and in October 2011, debt was restructured, with a 50% haircut.

That brings us back to today where Greece and the rest of Europe are at a nasty impasse. The odds of deal failure are quite high and ‘Grexit’ has become a real possibility. How bad would it be if Greece left the European Union? Maybe, not bad at all.

The world is ready for it:

  • More psychologically prepared than in 2009/2010 when the fear of contagion was very large.
  • More financially ready. Today, Europe has embraced its versions of QE- “whatever it takes.”
  • More economically prepared. Growth in the U.S. and Japan are doing much better. Parts of Europe are making progress. China keeps moving forward.
  • Removing this uncertainty could help the Eurozone. Some say that if Greece would leave, the bloc would be stronger. They call it the “ballast theory”- comparing the bloc to a hot-air balloon which would rise once Greece has been thrown overboard.
  • Contagion is always a risk, but probably not the risk it was when this all started.
  • Having a template for a country to leave the euro is likely a good thing.

Greece has a great cultural heritage. It has given the world some very important things. It’s a wonderful place to visit. Unfortunately, finance has not been its strong suit. Greek’s economy is about the size of Atlanta, Georgia. The world is prepared if there is a ‘Grexit’. Of course, no one knows how this drama will play out. Yet, everything should be fine with the exception of the volatility that this uncertainty brings to the stock markets.

We just need to stay focused on what we can control, particularly having a well-balanced and diversified portfolio consistent with our risk profile and staying invested.

Finally, we need to be ever grateful for being Americans and being able to celebrate our great country on July 4th. Happy Independence Day! Have a fun and safe weekend!

American flag flying in the wind

Ask DWM: What do I need to know about (and do with) my credit scores?

CreditScoreRangesAnswer: Great question. Banks severely tightened their lending standards after the subprime mortgage crisis, making your credit score more critical than before, even for high net worth individuals. When lenders are determining whether to extend credit and at what interest rate, one of the most important factors they look at is your credit score.

Actually, you don’t have one score, but several. You have a Fair Isaac Corp. (“FICO”) score from Equifax, Experian and TransUnion. Each is a score on a particular day of how much of your available credit you have used, payment history, length of credit history, types of credit, and new accounts and inquiries. They vary slightly because some creditors don’t report to all of the credit bureaus, and some bureaus may have errors on your report. The balance of how these factors affect your score depends on your length of credit history and other factors, and their impact on your score changes as your credit profile changes over time.

Before extending you credit, a lender will not only consider how much credit you have available to you, but also how much (as a percentage) of that credit you are currently using, as this could be an indicator that you are experiencing financial difficulty. For example, if you have a $50k total credit card limit (spread over several cards), and are carrying a total of $20k in balances (40% utilization rate), it will have a negative effect. This is true even if you use your credit cards to earn reward points and pay off the balance in full each month. You want to keep your utilization ratio below 30%, and people with the best scores generally use less than 10% of their available credit at any given time. Of course, lenders take into consideration how much credit is already available to you, whether you are utilizing it or not, because they want to make sure you would be able to afford all your payments if you did choose to use more credit. So, it’s a balancing act.

Avoid late payments. One late payment can hurt your score for more than a year. If you’re out of town or just flat out miss making the payment on time, call the credit card company and ask them to waive penalties and most importantly, not report this infraction to the credit bureau. Consider signing up for automatic payments to prevent this situation. Credit cards and most other loans offer the option of having the minimum payment deducted, and if you wish to pay more or pay early, you may still do so.

The length of your credit history gives a lender an idea of your behavior over time. This includes how long you have had credit, how old your oldest account is, and how long it has been since you used certain accounts.

“Types of credit” generally makes up a small part of your score. This may include installment loans, retail accounts, credit cards, and mortgage loans. Lenders like to use this to gauge how you handle installment vs revolving credit for example.

Credit inquiries hurt your score. When you shop for a mortgage or a car or education loan, those inquiries count slightly against your score. However, multiple inquiries about your credit within a few weeks, typically count only as one “demerit”. Additionally, opening several accounts in a short period generally signals a greater risk to creditors.

Once a year, you can get a free credit report by going to www.annualcreditreport.com. You may order a report from all three bureaus at once, or order one from a different bureau every four months to keep a more diligent eye on your credit throughout the year. Be sure to dispute any errors you find. This will provide details of what’s in your credit file but not your score. If you are planning to apply for new credit in the next year, you should check your score and take steps to improve it if needed. Generally scores over 740 receive the best mortgage rates. (Scores range from 300-850). There are several ways to keep an eye on your score over a period of time. Discover credit cards provide a score for free on your monthly statement, or you can check it any time you log in. You can also get a free FICO report on several websites like Credit Karma, but the score on the free one may not necessarily be the score a potential lender would receive. The same goes for buying your score directly from the bureaus. (There are actually 56 different versions of your FICO score, depending on which software and industry-specific versions the lender is using- auto, mortgage, credit card, etc.) A general version FICO report for one bureau costs $19.95, or $59.85 for all three, and includes ratings for different factors that are helping or hindering your score.

We encourage you to take a look to see where you stand and take steps to maintain great credit scores. Like your other assets, they need to be maximized and protected.

Ask DWM: How Does the Likely Fed Rate Hike Impact Your Asset Allocation and Investments?

janet-yellen

Investors and markets are watching this week’s Fed meeting very carefully. Fed Chairwoman Janet Yellen and Fed officials appear to be moving toward raising short-term interest rates this year. Most expect September will mark the time of the Fed’s first rate increase since 2006. A key challenge for the Fed will be the communication of where future rates are going.

We all remember two years ago when Fed Chairman Ben Bernanke created a “taper tantrum” (and threw all markets in chaos for one month) when he signaled it was thinking about ending the QE program. Chairwoman Yellen wants to avoid that and has recently been emphatic that she expects rate increases to be slow and gradual once they start. In fact, in a March speech in San Francisco, she used the term “gradual” or “gradually” 14 times.

The U.S. economy is making progress, with strong job gains and rising wages. Auto sales are way up and factory machines are humming. Small business and consumer sentiment is up as are retail sales. The Producer Price Index rose slightly higher than expected. This data is likely too strong for investors or the Fed to ignore. So, yes, it looks like a rate hike will likely occur this year.

Of course, none of us can control when the Fed will raise rates, what rates will be longer term and how well the Fed communicates the future. We can, on the other hand, control our asset allocations and our investments. That’s where our focus should be.

Let’s revisit our annual DWM seminar in October 2013 entitled “Rising Interest Rates: Should I Be Concerned?” Here’s a quick summary of the key points that are still valid today.

  • The bond bull market may be over.
  • Bonds still play a vital role within an overall portfolio as do all of the asset classes.
  • Equities typically perform well in rising interest rate environments, with the “sweet spot” being when the 10 Year Treasury Bond rates are between 3% and 4%.
  • Use of multiple asset classes lead to non-correlation effects that ultimately lead to better long-term results.
  • One needs at least 15% in alternatives to make a difference.
  • Stay invested.

So, focusing on asset allocation, you should start by revisiting your risk profile. This includes risk capacity, risk tolerance and risk perception. Your risk profile is unique. You need to look at your long-term financial goals and plan and honestly assess how you are “wired.” It’s not as simple as looking at your age. We work with clients in their 80s who have an aggressive risk profile and clients in their 30s who have a conservative risk profile. Your risk profile will determine your asset allocation and therefore your portfolio mix of equities, fixed income and alternatives. In the long-term, your asset allocation is the primary (90%) determinant of the return of your portfolio.

2013 was a watershed year for fixed income. For three decades, fixed income had always been an asset class with low risk and good returns. The “taper tantrum” signaled the start of the end of the bond bull run making fixed income riskier and reducing the likelihood of 8% annual returns going forward. Given this change in risk/return characteristics within the fixed income area, the same risk tolerances score from prior years may not necessary lead to the same asset allocation mix. Hence, many DWM clients reduced their allocation to fixed income in 2013, some quite significantly.

At the same time, DWM fixed income holdings were re-positioned in an effort to reduce risk and potentially increase returns for an expected rising interest rate environment:

  • Reduced duration (when interest rates rise, bond with the longest maturities suffer the greatest drop in price)
  • Added international developed and emerging exposure
  • Added floating rate exposure with very low duration and ability to perform in rising markets
  • Continued diversification through low cost vehicles
  • Kept credit quality solid

So, with all the uncertainty regarding when, how high, and how often the Fed raises rates and how the markets will react to these changes, we suggest you focus on what you can control. If you haven’t already done so, now is a great time to review your asset allocation and your investment holdings. Our DWM clients know that is one of the highlights of our meetings with them, hopefully quarterly or even more often when appropriate. For others, we’re happy to help provide a second opinion. Just give us a call.

Voice Mail: Perhaps Archaic, Yet Still Needed

can phoneLate last year, Coca-Cola said it was eliminating voice mail at its headquarters in Atlanta. JPMorgan Chase announced last week that it was doing away with office voice mail for many of its employees. They tied their decision to tightening expense controls. They will save $10 per month per line.

Certainly, office voice mail is not the medium of choice for everyone. Millennial Amy Brown posted a popular joke on twitter on ways to get in touch with her: “1. text, 2. facebook chat, 3. tweet, 4. e-mail, …998. skywriting, 999. smoke signals, 1000. voice mail.” Text messaging, largely the domain of friends and families, is starting to be seen more in the professional realm. As millennials become the largest generation in the workforce, their habits are going to have a huge influence on workplace practices. Jena McGregor of the Washington Post puts it this way: “When it comes to voice mail, Millennials are pretty much over it, while their love affair with texting seems to know no bounds.”

Of course, I’m not a millennial. Heck, I remember when cell phones were the size of a brick and almost as heavy. I applaud the continual improvements in technology and try my best to understand and use them all. I recognize that voice mail is on the decline.

However, in my opinion, the form of communication shouldn’t be based on what’s easiest or less costly for me, but, more importantly, what works best for our clients and makes it easiest for them to get in touch and stay in touch with us.

We work with clients of all ages, some in their late 90s and some in their early 20s. Some older clients don’t own a computer, don’t use email, and certainly don’t text or tweet. Most of their communication is done by phone and they are quite comfortable leaving a voice mail if we’re on the other line or out of the office, knowing that they will likely get a call back in an hour or so.

Speaking personally, while I use email 80% or 90% of the time, there are certain times that I prefer using a phone. You can hear the other person’s voice and tone and usually a call offers more context. For me, it’s the next best thing to being there in person where you both can see reactions and observe body language. I use the phone for those who don’t use email, complex situations, very important topics and/or when I am concerned that an email message might not be understood or, worse yet, misunderstood.

It seems many companies have de facto given up on voice mail. These days, your call for help often results in the vendor trying to get you to their website (which is particularly annoying when your problem is that your internet service is down), putting you on hold for long stretches of time, asking you to call back later or just disconnecting you. Yes, I understand that it’s cheaper for a company to direct you to their website than have a fully staffed and trained customer service center.

But, again, the focus should be on customer service and adding value. As I mentioned in a DWM blog in March, Dr. Horst Schulze, one of the founders of the Ritz Carlton, offered his view on cost-cutting: “When we say it is deadly to cut costs that cheapen your product or service in ways that matter to your customer, we mean it.” Customers and clients are the lifeblood of any business. Excellent communication with them, using the medium or media appropriate for them is paramount.

Please be assured that we at DWM welcome your communication in any and all media. If you want to call, we’ll answer your call promptly. If we’re on the other line or out of the office, please leave a voice mail- we’ll get back to you shortly. We welcome the opportunity to stay connected.

And, if you have any thoughts or comments on this article or anything else, please contact us in your favorite medium: skywriting and smoke signals included.

Anatomy of a Portfolio Change – Core Equity Spotlight on SCHF

money on the brainAs part of our ongoing series of spotlighting one of our Investment Model preferred holdings, I would like to provide some color on the Schwab International Equity ETF (symbol: SCHF). SCHF is brand new to our Core Equity Model Portfolio so we thought it may be educational to our readers to go through the mechanics involved during a portfolio change to spotlight some of the behind-the-scenes processes.

Our main investment management goal: participating in “good” times and protecting in “bad” times. To put it in baseball terms, and I must do that as the Chicago Cubs are playing meaningful baseball still here in June, those that have worked with us know that we aren’t focused on hitting “home runs”; instead we are more interested in avoiding unnecessary risk and “hitting steady singles and doubles.”

How we seek to accomplish our goal:

  1. We have three main strategies: our Core Equity, Core Fixed Income, and Liquid Alternatives models.
  2. We use a combination of passive and active styles within our strategies. We generally use passive for our Traditional Core Equity and Fixed models, and use active for our Liquid Alternatives model.
  3. We generally only use relatively low-cost mutual funds and ETFs. (From last month’s blog, you learned that our Core Equity model had a weighted OER of 0.34% (now 0.32% after change described below), and our Core Fixed Model has a weighted OER of 0.37%.)

So, what’s our process? Here’s the short list in layman’s terms:

  1. Keep informed and educated. We stay abreast of the latest by reading a lot, attending conferences and trade shows, and networking with others both inside and outside of the financial industry.
  2. Constantly monitor the investment landscape for what’s new and knowing what’s already out there.
  3. Monitor and track current holdings. Adjust weights if needed.
  4. Analyze if anything out there is better than what we already have in place.
  5. Avoid unnecessary transactions and over-trading: transactions can be costly if not done correctly. Furthermore, it may lead to unnecessary tax ramifications.
  6. Understand where the market cycle is and never fall victim to trading based on emotion. I.e. buying the latest fad (buying high) or selling something temporarily out of fashion (selling low).
  7. Rebalance regularly to get your asset allocation percentages in-line with their target, thus, in concept, buying low and selling high.
  8. Trade efficiently. Strive for best execution. Every client is treated fairly when traded on a global basis.
  9. Ultimately, make thoughtful, wise changes where expected value is apparent. (No knee-jerk reactions).

Now, let’s look at that process in action. Last month, as part of our regular research, we came across a swap opportunity within our Core Equity strategy.

We found some advantages of holding the Schwab International Equity ETF (symbol: SCHF) over one of our then current Core Equity model holdings: the Dreyfus International Stock Index mutual fund (symbol: DIISX). Listed below are the major reasons why:

  • Similar coverage: both seek diversified international developed exposure, something we desire to hold for a minority allocation within this Core Equity strategy.
  • Lower Operating Expense Ratio (“OER”): SCHF has the lowest OER of any of its peers in this space at a ridiculously lean 0.08%.
  • No transaction fee: Typically, ETFs have a $8.95/trade transaction fee, but as part of Schwab’s relatively new ETF OneSource platform, SCHF can also be bought and sold with $0 transaction costs which is the same as DIISX, but…
  • Not subject to a Short-Term Redemption Fee (“STRF”): Mutual funds on Schwab’s OneSource platform generally need to be held for 90 days or are subject to a 2% STRF. STRFs were put in place to prevent “day trading” these funds which in many people’s eyes are meant for the long-term. However, ETFs are a different breed of animal in that they trade intra-day and the day trading issues are really not valid. As such, ETFs both on and off Schwab’s ETF OneSource platform are not subject to any STRF. Fabulous!

DIISX had been good at providing us with diversified international developed exposure while charging a modest 0.60% OER. But in this fast paced age, new products are increasingly becoming available. A lot of them are just a silly variation of something we already have, or something completely unnecessary. But every once in a while something decent comes out which may not be a perfect fit at first, and we keep it on our radar. In the case of SCHF, we needed to make sure that Schwab ETFs would develop a meaningful following and that this security would have appropriate liquidity (measured by its average trading volume) – those are both valid today. Furthermore, the success so far of the Schwab ETF OneSource platform, with its attractive characteristics listed above, made our decision to make a portfolio change an even easier one.

As always, please don’t hesitate to ask any questions about costs, trading, investment vehicles or anything else. And, go Cubs!