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DWM is committed to learning for its team, clients and friends. In this changing world, it’s extremely important to stay current in all areas impacting your financial future.

We encourage all of team members to “drill down” on current topics important to you and contribute to our weekly blogs.  Questions from our clients and their families are often featured in our blogs.  

Financial literacy for clients and their families is very important to us.  We generally hold an annual wealth management seminar for all of our clients.  We encourage regular, at least semi-annual, meetings in person with our clients to review family updates, progress on financial goals, asset allocation and performance of investments.  We’re happy to assist younger members of the family as part of our total wealth management program.

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Economy Celebrates 10 Years of Growth: Is it Time to Party?

Written by Les Detterbeck.

 

Economy celebration

Next week will mark the 121st month of the current bull market- the longest business cycle since records began in 1854. Based on history, a recession should be starting soon. Bond rates now form an “inverse yield curve” with shorter term rates above longer term, which typically signals a downturn. Business confidence is down. However, 224,000 American jobs were created in June and equities continue to soar, rising 16-20% year to date. Is it time to party or not?

The business cycle appears to be lengthening. The current expansion, coming after the worst financial crisis since the Great Depression, has been unusually long and sluggish. Average GDP growth has been 2.3% per year, as compared to the 3.6% annual growth in the past three expansions. The workforce is aging. Big firms invest less. Productivity has slipped. And, Northwestern Economics Professor Robert Gordon continues to assert that American’s developments in information and communication technology just don’t measure up to past achievements including electricity, chemicals and pharmaceuticals, and the internal combustion engine.

However, the changing economy may now be less volatile for a number of reasons. 1/3 of American’s 20th century recessions were caused by industrial declines or oil-price plunges. Today, manufacturing is only 11% of GDP and its output requires 25% less energy than in 1999. Services are now 70% of our GDP. Furthermore, the value of the housing market is now 143% of GDP, as compared to a peak of 188%. Banks have lots of capital.

Finally, inflation has been very low, averaging 1.6% in the U.S. (and 1.1% in the euro zone) per year during the current expansion. In earlier business cycles, the economy would surge ahead, the jobs market would overheat, causing inflation to rise and leading the Federal Reserve to put on the brakes by raising interest rates. Today, it’s different. Even though the unemployment rate is at a 50 year low of 3.7%, wage growth is only 3%. As the Economist pointed out last week in “Riding High,” American workers have less bargaining power in the globalized economy and are getting a smaller percentage of company profits, keeping inflation down. The Fed recently announced that it is less concerned about rising prices and more concerned about growth slowing and, therefore, will lower interest rates at its meeting next week.

Changes in the economy to slower growth, more reliance on services and lower inflation all contribute to longer business cycles. Yet, the changing economy, particularly globalization and technology, has also produced new risks.

Manufacturing that was formerly done in the U.S. is now outsourced to global producers. These chains can be severely disrupted by a trade war. This could produce a major shock- imagine if Apple was cut-off from its suppliers in China. Also, take a look at the impact that the prolonged grounding of Boeing’s 737 MAX is having on the U.S. economy. It’s hurting suppliers, airlines, and tens of thousands of workers, while $30 billion of the MAX sit grounded. Global supply chains are extremely interconnected these days.

IT is significantly linked as well. Many businesses outsource their IT services via cloud-computing to a few giants, including Alphabet (GOOGL).  85% of Alphabet’s $100 billion annual sales comes from advertising, which in the past has been closely correlated to the business cycle. GOOGL invested $45 billion last year, 5 times more than Ford. In fact, the S&P 500 companies invested $318 billion last year, of which $220 billion was spent by ten tech companies. The big IT companies are now facing regulatory issues worldwide. What would be the worldwide impact if GOOGL, Facebook or others get their “wings” clipped?

Also, finance issues could disrupt the expansion. Although housing and banks are in decent shape, private debts remain high by historical standards, at 250% of GDP, or $50 trillion. And, if the prime lending rate continues to decline, banks’ profits and balance sheets will likely weaken.

Lastly, politics is a big risk. There are the threats of trade wars with China and physical war with Iran. The big tax cut that pushed markets up in 2017 could now produce lower year over year earnings for companies. On Monday, July 22nd, Congressional leaders and White House negotiators reached a deal to increase federal spending and raise the government’s borrowing limit. This would raise spending by $320 billion, at a time when the annual deficit is already nearing $1 trillion, despite the continuing expansion.

Conclusion: Changes in the economy have produced reasons why business cycles are longer, yet more sluggish. Those changes have also added new risks for a continuing expansion and bull market. No one can predict the future. Focus on what you can control: Make sure your risk level is appropriate for your risk profile. Make sure your portfolio is prepared for the next downturn. And, yes, stay invested.

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Pizza Meets Technology

Written by Lester Detterbeck.

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What’s your favorite pizza? In Chicago, I love Lou Malnati’s deep-dish, in the Lowcountry, Grimaldi’s Brooklyn Bridge, with ricotta and Italian sausage, is amazing. And, now, thousands of years after pizza was invented, it too is being impacted by technology. Recently, the WSJ, in their “The Future of Everything” section, focused on the impact technology is having at Domino’s Pizza.

But first, let’s take a look at the history of pizza. Archeologists in Sardinia have found ancient remains from the 1st millennium B.C. of flattened bread that was apparently very popular. Writings in the 6th Century B.C. mentioned soldiers baking flatbread and covering it with cheese and dates. Stone ovens are mentioned in the 3rd B.C. when Roman historians described “flat round of dough dressed with olive oil, herbs, and honey baked in stones.” Excavations made in Pompeii show that in the 1st Century B.C. retail shops were making and selling pizzas.

Modern pizza seems to have come from Naples in the 16th century. Tomatoes from the New World combined with bread and other products to produce the earliest form of modern pizza. The Queen of Naples in the mid-18th century had a special oven in her palace for making pizzas. Antica Pizzeria Port’Alba, the first modern pizzeria, opened in Naples in 1830. By the end of the 19th century, citizens of Naples were consuming pizza for breakfast, lunch and dinner.

In the early 1900s, the first Italian pizza in America was introduced by street peddlers who walked up and down Taylor Street in Chicago. New York City got the first pizza license in 1905. Pizzerias spread across the U.S. in the early 20th century. In 1943, Chicago’s Ike Sewell invented the deep-dish pizza. In the 1950s, celebrities of Italian origin, including Frank Sinatra and Joe DiMaggio, promoted pizza. The first frozen pizza was released in 1957. Pizza Hut started in 1958, Little Caesar’s in 1959 and Domino’s in 1967.

These days, pizza is a huge business. According to 2018 “Pizza Power” report, the worldwide pizza market was $134 billion, with U.S. the top country, at $45 billion annually. There are 75,000 U.S. pizzerias and the top 50 chains have average unit sales of almost $600,000, with annual growth overall at 12%. The big winners were reported to be those who focused on consumer needs by embracing “websites, social media, online ordering and delivery technology.”

Domino’s, with 6,000 U.S. outlets is the world’s largest pizza company. Yet, their just-issued 2Q19 quarterly report showed slower growth. Their stock has gone “cold”- investors have “lost their appetite” for Domino’s Pizza. Technology has fueled new and improved competitors, delivery apps, online ordering and quality.

The growth of online ordering through companies like Grubhub and Door Dash has impacted Domino’s business. Domino’s, with its own delivery drivers, has declined to form partnerships with them. Also, food delivery companies, such as Uber Eats and Postmates, have jumped into the business aggressively with free or discounted delivery during the March NCAA tournament period with great success. Even though Domino’s hasn’t raised their prices on pizzas in over a decade, increases in same-store sales are slowing.

Ritch Allison, CEO of Domino’s, was recently interviewed by the WSJ for its “The Future of Everything” section. Mr. Allison was clear that “Pizza will endure. However, almost everything about how a pizza is made and transported to the customer is undergoing a high-tech shift.”

Domino’s has maintained that it won’t outsource delivery. Instead it will invest in operations to make delivery more efficient and better for customers. Low unemployment and rising minimum wages in some cities are pushing up labor costs and making it harder to find drivers. They’re working on a driverless vehicle smaller than a golf cart, with compartments that can be heated up or chilled. They are looking at drones and even deliveries by bike and scooter riders.

Mr. Allison indicated that they are working on upgrading their “Dom” automated telephone answering service. They’ve been missing customer calls during busy times. Their goal is to answer every call and hopefully build bigger orders as well. They hope improved data on customers will help them produce better menus, adding and deleting items over time based on demand patterns.

For Domino’s “Robots will help, but not replace human pizza makers.”   Robots can put dough balls on trays, but Mr. Allison wants to “keep the magic of pizza making” with humans. Domino’s is currently using, in locations in Australia and New Zealand, artificially intelligent cameras to photograph and grade each pie based on different criteria. This quality audit is designed to ensure that a subpar pizza never reaches a customer’s door. They hope to extend this quality method to operations worldwide.

Yes, even our beloved pizzas, that humanity has been eating for thousands of years, and hopefully for many more thousands as well, are being impacted by technology. Hopefully, that will make it easier in the future for all of us to get our perfect pizza at the perfect time.

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DWM 2Q19 Market Commentary

Written by Brett Detterbeck.

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Summer is finally upon us! Weather is steamy, kids are out of school, and it’s the midst of carnival season. Merriam Webster has several definitions of carnival including:

  • An instance of merrymaking, feasting, and masquerading
  • An instance of riotous excess
  • An organized program of entertainment or exhibition

Sounds a little bit like the markets we’ve seen in 2019 so far: it’s certainly been an entertaining program with all asset classes parading higher. But does this Fun House continue or is it all just a House of Mirrors….

Equities: You win a small prize! Equities continue to be the most festive part of the fairground, with many stock markets up over 2-4% on the quarter and now up around 12-18% on the year! Domestic and large cap stocks continue to outperform value and smaller cap stocks, which is typical of a late-stage bull market, this one being over a decade-long!

Fixed Income: You can trade in that small prize for a medium prize!  Like a Ferris Wheel where one side goes up, the other side comes down; yields and bond prices operate the same way. With the 10-yr Treasury now down to around 2.06% at the time of this writing compared to 3.2% last November, it’s no surprise to see strong returns in bond land. In fact, the Barclays US Aggregate Bond Index & the Barclays Global Aggregate Bond Index popped another 3.1% and 3.3%, respectively for the quarter and 5.6 & 6.1%, respectively year-to-date (“YTD”).

Alternatives:  You can trade in that medium prize for the largest prize! The merrymaking continues as most alternatives we follow had good showings in 2Q19, evidenced by the Credit Suisse Liquid Alternative Beta Index, our chosen proxy for alternatives, up 1.3% and now up 5.7% YTD.

It almost feels like you could go over to the Duck Pond and pick up a winner every time. There are indeed a lot of positives out there:

  • US stocks near record highs
  • A stock-market friendly Fed
  • Historically low unemployment with inflation that appears totally under control
  • Americans’ income and spending rising, leading to relatively strong consumer confidence

But this carnival has some roller coasters in the making given some riotous issues including:

  • US-China trade tensions most likely not ending with a solid deal anytime soon, which will fuel anxiety
  • A weakening European economy due to tariffs and other issues, which could bleed over to all markets
  • Slowing US economic growth here as the Tax Reform stimulus wears off
  • A relatively expensive US stock market, evidenced by the S&P500’s forward PE ratio now at 16.7 times versus its 25-year average of 16.2

It definitely wouldn’t be fun if the yummy funnel cake turns into spoiled fried dough…Yuck! We don’t know exactly when or what will happen, but we do know that at some point this bull market will indeed end. You cannot time the market so forget about getting out of the Cliff Hanger before the time comes. That said, you want to stay invested and continue to control what you can control. Don’t wind up being on the bottom end of a Whack-A-Mole game; make sure your portfolio is prepared for the next downturn, which includes making sure your risk level within is appropriate for your risk tolerance.

So don’t wind up being a carny clown. If you want to continue hearing “winner-winner-chicken-dinner!”, work with a proven wealth manager and you’ll be the one controlling the Zipper!

 

Zipper

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