Hyre Weekly Commentary June 11, 2012Add another country to the European bailout list.Over the weekend, Spain requested up to $125 billion in bailout money to shore up its ailingbanks, according to Bloomberg. Spain’s banks and the country’s economy are reeling from thebursting of a massive property bubble. Things are so bad in Spain that the country is back inrecession and nearly 25 percent of the country’s workers are unemployed, according to The WallStreet Journal.Spain matters because it’s the fourth largest economy in the euro zone and if it goes bust, it maycreate chaos in euro land.Fortunately, if all goes according to plan, the new bailout money may be enough to reassureinvestors that Spain won’t go the way of Greece. Speaking of Greece, the next big event in theongoing euro zone debt crisis takes place this coming Sunday when Greece holds a new election.Depending on who wins, it could lead to “Grexit”—which means Greece leaving the euro. Thereis no precedent for a country leaving the euro so if it happens with Greece, we’re in uncharteredterritory.Back in the states, Fed Chairman Ben Bernanke spoke last week and said, “The situation inEurope poses significant risks to the U.S. financial system and economy and must be monitoredclosely.” He went on to say, “The Federal Reserve remains prepared to take action as needed toprotect the U.S. financial system and economy in the event that financial stresses escalate.”While he didn’t announce another round of quantitative easing, the markets were somewhatreassured that he might pull the trigger if the economy gets much worse.And let’s not forget China. They just announced a surprise interest rate cut which “raisedconcerns over the state of the economy,” according to MarketWatch.So here we are again, monitoring the situation in Europe, worrying about a hard landing inChina, and analyzing whether the Federal Reserve will ride to the rescue and print more dollars.It keeps our job very interesting!
1- 1- 3- 5- 10- Data as of 6/8/12 Week Y-T-D Year Year Year Year Standard & Poors 500 (Domestic 3.7% 5.4% 4.3% 12.2% -2.5% 2.6% Stocks) DJ Global ex US (Foreign Stocks) 2.0 -3.4 -20.2 2.9 -7.3 4.0 10-year Treasury Note (Yield Only) 1.6 N/A 3.0 3.9 5.1 5.0 Gold (per ounce) -1.8 0.1 2.5 18.7 19.2 17.2 DJ-UBS Commodity Index 1.6 -8.5 -22.5 0.8 -5.4 3.0 DJ Equity All REIT TR Index 4.5 10.4 8.9 26.9 0.6 10.2Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvesteddividends (gold does not pay a dividend) and the three-, five-, and 10-year returns areannualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-,five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield atthe close of the day on each of the historical time periods.Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.Past performance is no guarantee of future results. Indices are unmanaged and cannot beinvested into directly. N/A means not applicable.SOMETHING HAPPENED ON NOVEMBER 18, 2008 THAT HADN’T HAPPENED IN50 YEARS—what was it and what are the implications for your portfolio?Before we get to the answer, we need a brief review of history. Up until 1958, the dividend yieldon common stocks was higher than the yield on bonds. This seemed to make sense becausestocks were generally riskier than bonds and in order to entice investors to buy stocks, they hadto be incented with a higher yield. But in 1958, that flipped. Stock prices rose, the dividend yieldfell and the yield on bonds became higher than stocks. For the next 50 years, this relationshipremained as bonds continued to out-yield stocks.Then, on November 18, 2008, the relationship reversed as stocks delivered a higher dividendyield than bonds. This was just a brief flirtation and the relationship flipped again shortlythereafter and bonds resumed their usual higher-yielding status.Now, with the dramatic decline in bond yields, stocks are doing that rare thing and delivering ahigher yield than bonds, according to the Financial Times.Here are several thoughts on the implications of stocks yielding more than bonds. (1) Investors are more risk averse. With bond yields extremely low, this suggests investors are more concerned about safety than double-digit returns. (2) Bond prices are at an extreme level. With 10-year Treasury yields having recently touched an all-time record low, there may not be much room for them to go lower— since 0 percent is the floor. (3) Government intervention may be distorting the normal relationship between bonds and stocks. Heavy bond buying by the Federal Reserve could be artificially depressing bond yields and rendering some of the traditional market relationships moot.
(4) Investor psychology may change over time. Prior to 1958, investors wanted a higher yield from stocks because stocks were riskier. Then, over the next 50 years, bonds had a higher yield as investors became comfortable with the idea that stocks offered a yield plus a chance for capital appreciation—even with more volatility. And now, we’re back to risk averse investors seeking higher yields from stocks.Sources: Financial Times, BusinessWeekFrom an investment standpoint, seeing a major change in a long-term trend like the yieldrelationship between bonds and stocks suggests we may be at an extreme level in bonds andstocks. And while nobody knows how long it may take for this relationship to return to a moretraditional level, we’ll try to find ways to profit from it on your behalf.Weekly Focus – Think About It…“And so with the sunshine and the great bursts of leaves growing on the trees, just as things growin fast movies, I had that familiar conviction that life was beginning over again with thesummer.”--F. Scott Fitzgerald, authorBest regards,Jim Hyre, CFP®Registered PrincipalP.S. Please feel free to forward this commentary to family, friends, or colleagues. If you wouldlike us to add them to the list, please reply to this e-mail with their e-mail address and we willask for their permission to be added.Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC.* The Standard & Poors 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market ingeneral.* The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.* The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on theNational Association of Securities Dealers Automated Quotation System.* Gold represents the London afternoon gold price fix as reported by www.usagold.com.* The DJ/AIG Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. TheIndex is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seenas a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate InvestmentTrust (REIT) industry as calculated by Dow Jones* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict futureperformance.* Consult your financial professional before making any investment decision.* You cannot invest directly in an index.* Past performance does not guarantee future results. mc101507* Some newsletter content was prepared by PEAK for use by James Hyre, CFP®, registered principal
* If you would prefer not to receive this Weekly Newsletter, please contact our office via e-mail or mail your request to 2074 ArlingtonAve, Upper Arlington, OH 43221.* The information contained in this report does not purport to be a complete description of the securities, markets, or developmentsreferred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee thatthe forgoing material is accurate or complete. Any opinions are those of Jim Hyre and not necessary those of RJFS or RaymondJames. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as asolicitation or an offer to buy or sell any security to herein. Tax or legal matters should be discussed with the appropriateprofessional.Jim Hyre, CFP®Registered PrincipalRaymond James Financial Services, Inc.Member FINRA/SIPC2074 Arlington Ave.Upper Arlington, OH 43221614.225.9400614.225.9400 Fax877.228.9515 Toll Freewww.hyreandassociates.comFind Us Here:Raymond James Financial Services does not accept orders and/or instructions regarding your account by email, voice mail, fax orany alternate method. Transactional details do not supersede normal trade confirmations or statements. Email sent through theInternet is not secure or confidential. Raymond James Financial Services reserves the right to monitor all email. Any informationprovided in this email has been prepared from sources believed to be reliable, but is not guaranteed by Raymond James FinancialServices and is not a complete summary or statement of all available data necessary for making an investment decision. Anyinformation provided is for informational purposes only and does not constitute a recommendation. Raymond James FinancialServices and its employees may own options, rights or warrants to purchase any of the securities mentioned in email. This email isintended only for the person or entity to which it is addressed and may contain confidential and/or privileged material. Any review,transmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities otherthan the intended recipient is prohibited. If you received this message in error, please contact the sender immediately and deletethe material from your computer. 2074 Arlington Avenue, Columbus, Ohio 43221 614.225.9400 local | 877.228.9515 toll-free | 614.225.9400 fax www.hyreandassociates.com | email@example.com Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC.