June 2011 Q2, 2011 Investment & Planning Newsletter Parallel News and Events Parallel continues the search for new partners and advisors in both our San Francisco and Denver offices, and beyond. To lead this initiative, Chris Powers has joined Parallel as Managing Director. Chris's bio can be found on the team page of paralleladvisors.com. Parallel is sponsoring teams for two bicycle events this summer. Jamey Mills of our Denver office is organizing a team for the Colorado Bike MS ride. This two day, 150 mile ride, benefits the Colorado-Wyoming chapter of the National MS Society. Parallel is also a primary sponsor of a 35 person team riding in the 2011 Livestrong Challenge in Davis, CA. Lucas Hatch from the San Francisco office will complete the 108 mile ride to raise money and awareness for the fight against cancer. Good luck to both Jamey and Lucas. info@paralleladvisors.com 866-627-6984 www.paralleladvisors.com About Parallel Parallel Advisors LLC, with offices in San Francisco and Denver, is an independent wealth management firm registered with the SEC. We specialize in managing investment portfolios for individuals, families and trusts and creating plans to help our clients accomplish their financial goals. Parallel Advisors, LLC 150 Spear Street, Suite 950 San Francisco, CA 94105 415.834.9107 Toll Free 866.627.6984 Denver Office: 7887 East Belleview Ave Suite 1100 Englewood, CO 80111 (303) 217-2935
Parallel Advisors Investment & Planning Newsletter June 2011 2 Monthly Market Commentary The market s primary focus during April was corporate earnings, which were generally positive. The technology and manufacturing sectors produced exceptional results while consumer spending, inflation, manufacturing, and the Chinese economy continued on their strong upward trajectories. GDP: The recent GDP report suggested a growth rate of 1.8%, in line with expectations but well below the fourth quarter number of 3.1%. This slowing was largely due to shifts in government defense spending and weather-related construction spending. The U.S. consumer spending growth came in at 2.7%, higher than the expected growth of 1% to 2%. Business investment spending grew 11% during the first quarter, while government spending (which comprises about 20% of GDP) fell 5%. Earnings: The technology sector showed promise as both Apple and Intel reported stellar results. Besides robust tech earnings, results in the manufacturing sector were also encouraging. Organic growth (versus acquisition-driven growth), auto-related data, and capital goods were positive. Earnings from the banking sector however, weren t as strong. New loan growth at many firms including J.P. Morgan Chase was almost non-existent. Overall, J.P. Morgan Chase revenues declined 9% while profits increased about 67%. Rising commodity prices were the main reason for mixed earnings in consumeroriented firms. At McDonald s, revenue increased but the stock fell about 1.9%. Housing: According to the federal government report, home prices were down 1.6% from January to February. Existing home sales increased 3.7%, reaching the 5.1 million unit mark. During the housing boom in 2005, the annualized number of existing home sales was as high as 7.4 million units. Outside the couple of odd months near the expiration of the two housing credits, the lowest sales number was about 4.5 million units. Inflation: Inflation reports from around the world were higher than expected. Year-over-year inflation accelerated to 5.4% in China in March 2011. In the euro zone, month-to-month inflation (annualized) accelerated to 2.7% in March up from 2.4% in February. Inflation continues to accelerate around the world despite attempts by central bankers worldwide to tighten rates and boost reserve requirements. During March, the U.S. producer price index and the consumer price index moved up 0.7% and 0.5%, respectively. Auto sales: Motor vehicle sales typically tend to be good indicators of consumer spending. The recent motor vehicle sales report indicated no change in the mix between domestic and import brands, which appears to be a sign that Japanese supply issues weren t holding back sales. Unemployment: The recent unemployment report revealed a 43,000 surge with claims for unemployment rising to 474,000, the highest level in eight months. The report suggested that the adjustment timing for a spring break in New York State followed by a new emergency benefit plan in Oregon were the main reasons for this surge. Employment: Employers added 244,000 jobs in April, which came in much higher than analysts estimates for the month. Goods-producing and service-providing sectors experienced the most job growth while government jobs posted a decline. On a year-over-year basis, overall payroll job growth increased 1%. According to Morningstar economists, auto sales figures, employment, production and manufacturing statistics, will remain key indicators of future economic health in the weeks ahead.
Parallel Advisors Investment & Planning Newsletter June 2011 3 Outlook and Investment Strategy We anticipate the U.S. economy will continue to expand in 2011 and 2012, albeit at a slower pace than we initially projected. We expect US growth to be 3.0% for 2011 with World GDP to average a bit higher at 4.5%. We expect core inflation to be contained in the 1% - 1.5% range. We forecast wage growth to be limited and unemployment to fall modestly, reaching the mid to high 8% range by year-end 2011. Interest rates will likely remain unchanged as the Fed stays on hold through 2011 and possibly through 2012. We are of the mindset that although the Federal Reserve Board will end Quantitative Easing 2 (QE2) in June, it will not shrink its balance sheet and will remain accommodating given the recent bout of dismal economic data. This should continue to keep rates low and risk assets in favor. Continued easy monetary policy and added liquidity will intensify inflationary pressures in the global economy. Although we have seen an easing in oil prices in the short term, we expect supply constraints to put pressure on oil over the longer term. In the event oil prices reach sustained high prices (north of $130/barrel), we can see further weakening in the economy as consumers continue to cut discretionary spending. policies likely to contribute to longer-term inflationary pressure, we are more likely to see rates rise than fall over the longer term investment horizon. This will eventually push bond prices lower. Examples of holdings that we believe offer a better risk-reward tradeoff include: short-term highyield bonds that have lower default risk thanks to their short maturities and careful credit research; flexible, absolute-return-oriented bond funds that have a broad toolkit with respect to the types of bonds they can own and their ability to limit the risk of rising rates; floating-rate funds that generate decent yields but that are not exposed to the risk of rising rates; and hedging strategies that are able to earn a return without the tailwind of declining stock prices. Given the weakness in the dollar and improving economics abroad, we are also allocating assets to foreign bonds that provide some hedge against a falling dollar. These investments are slightly riskier than core high-quality bonds in that they would provide less downside protection should we see a recession or deflation, but they are significantly less risky than equities. Since these positions are funded from reductions in both stocks and bonds, the net effect is to reduce overall portfolio risk while generating better returns in most scenarios. For the most part, the labor markets are struggling to climb out of an enormous hole. It will take years of moderate-to-strong economic growth before we return to unemployment rates in the 5% range (considered full employment ). In consideration of recent economic headwinds, big-picture risks such as Europe s debt problems, unrest in the Middle East, and other unforeseeable disastrous events, we are taking steps to further diversify our portfolios away from traditional equity and fixed income towards alternative asset classes. These alternative assets have better risk-reward metrics and provide a good inflation hedge. With interest rates currently very low, bonds are generating less yield. Further, with government
Parallel Advisors Investment & Planning Newsletter June 2011 4 The Importance of Rebalancing Over time, your asset-allocation policy can veer off track because of market ups and downs. This is illustrated quite clearly in the image below; a strong stock performance can cause a simple 50/50 portfolio mix to become unbalanced over time. After 30 years, what was once a 50% allocation to stocks now sits at 63% quite a jump. Moreover, not only does the portfolio s allocation change, but the portfolio s risk also changes, rising sharply from 9.2% to 10.9%. If your needs and/or risk tolerance have not changed, your allocation shouldn t either. But why would anyone want to sell investments that have done great in order to purchase laggards? While rebalancing might seem odd at first, it is all about risk control. If more and more of your total portfolio winds up in one investment, you risk losing a lot should that investment stumble. Dangers of Market Timing Two of the most dangerous words in the investing world are market timing. Market timing occurs when investors try to predict which direction the stock market will head. While some investors have been known to make money timing the market, it is highly inadvisable for long-term investors to try this extremely risky strategy. Opponents of Market Timing: Most investors and academics believe it is impossible to forecast market movements. Such a technique amounts to gambling when compared with a sound investment approach. It fails far more than it works, and market timers often end up buying high and selling low. Furthermore, you run the risk of missing periods of exceptional returns. For example, over the past 20 years, a $1 investment in stocks, as represented by the Standard & Poor s 500, would have grown to $5.75. If that same $1 investment happened to miss the best 13 months of stock returns over the past 20 years, the ending value would have equaled only $1.96. This would have been less than the value for an investor in a 30-day Treasury bill, a.k.a. cash, $1.97. Only those who remained invested in stocks throughout the entire period were sure to get market exposure during the crucial hot months. Advocates of Market Timing: On the contrary, a number of websites, newsletters, and other trading services boast they can time the market. While their returns may have in fact beaten the market by a considerable margin, it s safe to assume that these systems can t consistently hold up over the long term. On some occasions and during some stretches of time, market timing can help generate impressive profits. However, you must be familiar with the dangers behind such an approach.
Parallel Advisors Investment & Planning Newsletter June 2011 5 Disclosures Parallel Advisors, LLC is an SEC-registered investment adviser with its Principal place of business in the State of California. Parallel Advisors is in compliance with the current notice filing requirements imposed upon SEC-registered investment advisers by those states in which Parallel Advisors maintains clients. Parallel Advisors may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from a notice filing requirements. This newsletter is limited to the dissemination of information pertaining to Parallel Advisors investment management services and general economic market conditions and is not intended as personalized investment advice. There is no guarantee that views or opinions expressed in this newsletter will come to pass. Past performance is not indicative of future results, and it should not be assumed that recommendations made in the future will be profitable or will equal the performance of any securities or other information set forth herein. The managers and products discussed herein are considered past specific recommendations. In compliance with SEC regulations, complete details regarding all manager recommendations made within the immediately preceding 12 months are available free of charge upon request. In addition, performance disclosed herein may vary client by client due to cash movements, tax situations or other client directed mandates. Any subsequent, direct communication by Parallel Advisors with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Parallel Advisors, please contact Parallel Advisors or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). 2011 Morningstar, Inc. All Rights Reserved. The information contained herein (1) is intended solely for informational purposes; (2) is proprietary to Morningstar and/or the content providers; (3) is not warranted to be accurate, complete, or timely; and (4) does not constitute investment advice of any kind. Neither Morningstar nor the content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. "Morningstar" and the Morningstar logo are registered trademarks of Morningstar, Inc. Parallel Advisors 150 Spear St. Suite 950 San Francisco, California 94105 info@paralleladvisors.com www.paralleladvisors.com Tel:866-627-6984