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January 10, 2012 - Vol 6 Issue 2
Dear Reader,
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 The Misreading of Reinhart and Rogoff
By Robert Huebscher
If the rallying cry for deficit reduction rests on an intellectual framework, it would be the work of Carmen Reinhart and Ken Rogoff, whose book, This Time is Different, has been hailed for its exhaustive historical study of financial crises. A key finding of those scholars - that economic growth slows once the ratio of debt-to-GDP exceeds 90% - has been widely cited by those calling for decreased government spending. But those calling for deficit reduction have largely ignored a number of caveats that Reinhart and Rogoff gave with respect to their 90% threshold, and as a result many warn that the US faces the imminent danger of a Greek-like sovereign-debt crisis.
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Videos (click on the thumbnail to view)
 The Trouble With Buying a Bond by Matt Tucker of iShares
One of the advantages of a fixed income ETF is that it provides accessibility and price transparency in an asset class that can be problematic in both respects. Find out what happens when one of our own fixed income experts, Head of iShares Fixed Income Strategy Matt Tucker, tries to buy a bond in his own personal account.
Backing Brazil and Avoiding Indian Inflation
By Russ Koesterich of iShares
In his latest video installment, iShares Chief Investment Strategist Russ Koesterich takes investors to Latin America and to explain why Brazil is his favorite spot in the region. But for investors who might be interested in India, Russ has some words of caution.
 Minimizing the Market's Peaks and Valleys
By Daniel Morillo of iShares
It may have volatility in its name, but the minimum volatility investment strategy was not designed to be used purely in volatile times. In this video, Daniel Morillo, Global Head of Investment Research at iShares, explains the concept behind minimum volatility investment solutions and how they can help investors manage a portfolio's exposure to risk.
 A Different Way to Climb the Bond Ladder
By Matt Tucker of iShares
To generate steady cash flow, many fixed income investors use a technique called bond laddering: purchasing multiple bonds, each with different maturity dates. Matt Tucker, Head of iShares Fixed Income Strategy, explains how some investors are using ETFs to pursue that same strategy.
A Top Sector Pick for 2012
By Russ Koesterich of iShares
With 2011 winding down, it is time to think about positioning your portfolio for the New Year. In this video, Russ Koesterich, iShares Global Chief Investment Strategist, explains why energy is his favorite sector for 2012. He also gives three reasons why investors should approach the utilities sector with caution.
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Safe Withdrawal Rates: A Do-It-Yourself Approach
By Wade Pfau
Reconciling the assumptions that underpin safe withdrawal rate studies with one's own capital market expectations and constraints is a daunting task, since those studies rarely reflect the practical realities of an advisory practice. But new research now provides a generalized framework for determining a safe withdrawal rate for a given retirement duration, acceptable failure probability, asset allocation and capital market expectations. Advisors no longer must be constrained by the assumptions and choices of others.
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Gundlach on the Key Risk for Bond Investors
By Robert Huebscher
Watch out if you own a bond fund that underperformed its benchmark by 2% or more last year, as most did. Rather than put their careers at risk by suffering a second year of poor performance, those fund managers will turn to indexation, according to DoubleLine's Jeffrey Gundlach. And since the Barclay's Aggregate Index holds nearly 35% of its assets in Treasury bonds with near-zero yields, its investors will endure poor returns.
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How an Advisor Doubled New Clients
By Dan Richards
It's not always the bold strategic initiatives that pay dividends; rather, executing the little things makes a big difference. In the fall of 2010 I ran a workshop for advisors in which I discussed a regular focus on a short list of high priority prospects. An attendee described how he'd used this idea last year as the jumping off point to add 15 minutes to his Monday morning team meeting - and doubled the number of new clients.
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Using the ECRI WLI to Flag Recessions
By Dwaine van Vuuren
In September 2011, the ECRI proclaimed a new U.S recession would begin sometime in the coming year. It based its prediction on a host of its own internal long-leading indexes, together with its widely followed weekly leading index (WLI). I want to focus on the proper use of the WLI and examine its accuracy in recession dating, in order to put this current recession call into context.
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2011: The Famine That Followed the Feast That Followed the Fiasco
By Ron Surz
Ron Surz provides his award-winning commentary on the US and global markets.
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I Can See Clearly Now...
By Mariko Gordon
There is a lot to learn by bringing in an objective third party to weigh in on one's investment process. I highlight the benefits we realized by allowing a trusted adviser behind the curtain.
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Our Most Read Article from Last Week: New Measures of Risk By Adam Jared Apt
Understanding risk is essential to successful investment management, yet most common measures, like beta, capture only risk within markets - disregarding systemic risk of the markets themselves. Fortunately, new research is now shining light on "fragility" or systemic risk - how fast and how severely an unanticipated event will propagate through the markets.
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Highlights from Market Commentaries
 Towards the Paranormal
The New Normal, previously believed to be bell-shaped and thin-tailed in its depiction of growth probability and financial market outcomes, appears to be morphing into a world of fat-tailed, almost bimodal outcomes. A new duality credit and zero-bound interest rate risk, characterizes the financial markets of 2012, offering the fat left-tailed possibility of unforeseen policy delevering or the fat right-tailed possibility of central bank inflationary expansion. Until the outcome becomes clear, investors should consider ways to hedge their bets.
Tags: Equities US
Towards the Paranormal by Bill Gross of PIMCO
 The Right Kind of Hope
We enter the year with great hope. But our hope is not for continued speculation and the maintenance of rich valuations (that only look reasonable because long-term cyclical profit margins are at a short-term peak about 50% above their historical norms). Our hope this year is for a return to a proper investment opportunity set - where saving is encouraged and rewarded by sufficiently high prospective returns, and the cost of capital is high enough to discourage high-risk, low-return investments and unsustainable fiscal deficits.
Tags: Equities Bearish US
The Right Kind of Hope by John P. Hussman of Hussman Funds
Rethinking the Growth Imperative
Modern macroeconomics often seems to treat rapid and stable economic growth as the be-all and end-all of policy. But, while that is the message from graduate classrooms to central-bank boardrooms to newspapers front pages, is it true?
Tags: Behavioral Finance
Rethinking the Growth Imperative by Kenneth Rogoff of Project Syndicate
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