McDonald’s Great Deal: Good for You Also

On July 29, 2010 McDonald’s Corp did what many Americans are doing, and even more wish they could do, which is to borrow funds at record low interest rates.

The Wall Street Journal reported that McDonald’s borrowed $750 million in the bond market, selling 10 year bonds paying 3.5% and 30 year bonds which pay 4.875%. These are the lowest rates that a US company has been able to pay on a bond since at least 1995, according to the WSJ article. The article cited many other companies which are doing the same, at record low interest rates.

While these are historically low borrowing rates, and thus, for the purchasers of the bonds, they are receiving low returns on the bonds, there is a long term positive to this. For shareholders of McDonald’s, and many other companies that are issuing debt at this time, these low rates are providing these firms cash with very low cost of capital. They will be able to use the funds to grow and expand their businesses, or to pay off other higher interest debt. Either way, their intention is to increase their companies’ cash flow and earnings.

In the short run, the stock market can be quite volatile. In the long run, a company’s stock price should be correlated to it’s ability to generate cash flow and earnings. Thus, by borrowing at these low rates, their future stock prices should be positively affected, which is good for stockholders in general. Another reason to be optimistic about the future prospects of equity markets.

Source: McDonald’s Deal Sets Low for Bond Interest Rates,, 7/29/10

The Big Short: What I Learned

I finished reading Michael Lewis’ book The Big Short a few weeks ago and it has really stuck with me. I have previously written about the book in a post dated June 19, 2010.

If you want to understand, in depth, about the sub-prime mortgage crisis and those few individuals and institutions that really predicted the implosion and made huge sums of money, this is a great read. The book is well-written and you’ll learn a lot at the same time.

What has had the most impact to me, after considering the book for a while, is the Big Picture of how these few players were successful. To me, this is the benefit of reading the book, and thus, for our clients.

These investors (some were individuals, some started as individual investors and then formed hedge funds, some were institutions; I’ll use the word investors to encompass them all) who were featured in the book were independent thinkers. They did not follow Wall Street. They followed their own thoughts. They were very disciplined and incredibly patient. They placed huge bets, in the hundreds of millions of dollars, which did not pay off for a number of years. This took a great deal of conviction, when many others, including their own fund investors, questioned their “wisdom.”

One hedge fund manager who was profiled had phenomenal returns for many years, so institutions were very willing to invest with him. As he invested more and more against the sub-prime markets, these investors grew very impatient with him. They demanded their funds back, but he would not allow them to (hedge fund rules). In the end, he made them all millions. But had they gotten their money back as they wanted, they would not have profited. If it was not for the manager’s forceful patience and insistence that he would be proven correct in the long run, these investors in his fund would have missed out on his tremendous thinking.

The lesson for us is that we should not follow what we hear on TV, in the papers and what market “experts” tell us. After years of careful research and thought, we have adopted and adhered to a disciplined investment philosophy which is fundamentally sound and rationale. It is academically based and not based on “predictions” and calls on what the market will do in the next week or few months.

It requires discipline and patience, but will be rewarded in the long run. With proper planning, it will provide our clients with a sense of security. It is a clear philosophy, which can be understood.

As we discuss with clients the ups and downs of the market in the future, the lessons of The Big Short will be a way to clarify why patience and discipline are so important. It is our role as your advisor to assist you in maintaining these qualities, which will lead to a more successful investment experience.

New FDIC Rules and Planning Opportunities

As a result of legislation enacted on July 21, 2010, FDIC insurance for bank deposits has been permanently increased to $250,000 per depositor, per insured bank.

This is great news for investors, as this permanent change extends the increase in coverage, which was to expire December 31, 2013. This means that investors who purchase CDs with maturities beyond 2013 will know their funds are insured.

There are very specific, and very beneficial rules that can greatly broaden this coverage far beyond $250,000 per individual. For example, if an investor has an account established using a Revocable Living Trust at an FDIC bank, and has 3 beneficiaries of the trust, the account will be insured up to $1,000,000. This is determined by combining the owner of the account and each beneficiary, so would total 4 times $250,000.

The maximum number of beneficiaries that are eligible for FDIC coverage would be 5, so the maximum coverage for an account established with a Revocable Living Trust is now $1,250,000.

This is of even greater relevance right now, given current interest rate conditions, as we are finding that CDs are good, secure investments, and even for taxpayers in high tax brackets, CDs may be safer and provide nearly the after-tax return of top quality municipal bonds.

If you have questions regarding how to structure your investments to gain the security of additional FDIC insurance, please contact our office.

Firm Updates

On a personal note, we would like to share with you that Keith and his family are expecting their fifth child later this year.

Brad’s oldest son, Daniel, recently graduated from high school and will begin college this fall at the University of Michigan.

We are also pleased to inform you that Brad was asked to join the Board of Directors of Fresh Air Society, the governing body of Tamarack Camps. This is one of many non-profit boards and committees that Brad serves on.

July 2010 Client Quarterly Letter

This is the quarterly letter that we sent to our clients during July, 2010:

Worldwide, stock markets during the second quarter of 2010 saw the return of market volatility, with wide daily swings and negative returns. Then, the first two weeks of July have seen positive returns, which erased these losses. We thought some perspective may help. Let’s look back, long term.

The year was 1960. The S & P 500 was at 60. The country would soon face the difficulties of Vietnam, the Civil Rights movement and the assassination of President Kennedy. It would also experience the Bay of Pigs crisis and land a man on the moon.

The year was 1970. The S & P 500 was at 92. The country was still in the midst of the Vietnam War. It would face the Watergate crisis, the resignation of President Nixon, the Middle East crisis and the ensuing gas shortages. The prime rate rose to over 15% by 1979.

The year was 1980. The S & P 500 was at 108. The country would face unemployment and high interest rates. Chrysler would face bankruptcy, but recover. The prime rate would reach 20% in April, 1980. The later part of the decade saw the Savings and Loan crisis, which resulted in the closing of 296 financial institutions with total assets of $125 billion.

The year was 1990. The S & P 500 was at 353. By 1994, over 1,500 institutions were closed from the 1980s S&L crisis. The country grappled with health care reform, but it was not approved. Health care costs continued to skyrocket. The internet arrived and high technology stocks would go nowhere but up. The mantra was “this time was different.” But it wasn’t.

The year was 2000. The S & P 500 was at 1,469. The tech bubble was about to burst. 9/11 became emboldened in our memory. Wars began in Afghanistan and Iraq, which still continue. The housing market went up, then came crashing down. Major financial institutions and industrial companies went bankrupt, were taken over by the government or were struggling to survive by the end of the decade.

It is now 2010. The S & P 500 was 1,115 at the beginning of the year.

What can we learn from this information?

Note the increase, over the long term, in the S & P 500.

    • 1960: 60
    • 1980: 108
    • 2010: 1,115
  • If you focus on the day to day problems that face our cities, countries, specific companies or parts of the world, you would focus on the near term and probably be quite pessimistic about future prospects.
  • If you focus on the longer term, you become more positive. You realize how resilient the economy, companies and countries can be to resolve issues, innovate and these successes translate into positive stock market returns.
  • When we develop your investment plan, we focus on both the short term and the long term. We use very prudent fixed income strategies for the foundation of your portfolio, so you will have a solid base. For the long term, we structure a diversified global portfolio, which should provide for positive results over a longer time period.
    • It is our role as your advisor to assist you in reaching a balance, so that your portfolio can give you the comfort and security that the fixed income allocation provides, while providing the longer term perspective to achieve the greater potential returns that stocks can provide.
  • We are realistic and very cognizant that many states, municipalities and governments face significant issues. But looking back through history, each time period faced different challenges and problems.
    • As we assist you in building and monitoring your investment portfolio, and work with you to provide financial comfort and security, we rely on historical facts and academic information and research, not on the media or market forecasters. We do not have a crystal ball. No one else does either.
    • We will work with you, so that you will have the patience and discipline that is required to be a successful long-term investor.

If you are concerned about the economy or the markets, call us. Meet with us. That’s what we are here for.