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September 28, 2010 - Vol 4, Issue 39



Dear Reader, 

Join the upcoming BlackRock webinar on "Finding Income in a Slow-Growth Environment" with Bob Doll, Chief Equity Strategist and Rick Rieder, CIO of Fundamental Fixed Income.  Click here to learn more.

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No commodity impacts the global economy more than oil.  When geopolitical threats loom, two questions often dominate discussion: Will the price of oil rise? And what will be the economic consequences?  We review the key drivers of recent, current, and forecast oil prices, including a template for the necessary eventual alignment of supply and demand.

Investors look to the commodity market to provide three primary benefits: portfolio diversification, inflation protection, and equity-like returns. However, empirical data shows that over the last decade, shifts in underlying fundamentals have undermined the role which commodities are expected to play in a diversified portfolio, particularly relative to natural resource equities.  RS Investments reviews the return streams generated by both commodities and natural resource equities in the context of the benefits expected from each investment option in their whitepaper.  We thank them for their sponsorship.

The Dodd-Frank Reform Bill and Amendments to the SEC custody, raises the assets threshold for federal regulation of investment advisers from $30 million to $100 million.  Amendments to rule 206(4)-2, the custody rule, will impact most federally registered advisers. What do all these changes mean for you? ByAllAccounts sat down with Barry Schwartz, a Founding Partner at ACA Compliance Group to get his perspective. During the presentation ByAllAccounts present findings from their survey of over 500 advisors and Barry talks specifically about how to interpret the rule, what to expect from the surprise examination process and changes advisors should consider making as a result of the regulations. We thank them for their sponsorship.

Patrick Kuhse is the last person you'd expect to give a lecture on business ethics. As a deputy bond trader for Oklahoma's $9 billion general fund during the early 1990s, Kuhse arranged kickbacks for his superiors in the state Treasurer's office. In return, he received an increase in his commissions which, over time, netted him $3.89 million more than he would normally earn, according to court estimates.  But today, business ethics are his specialty.

Time has always been the scarcest resource for successful financial advisors. Given all the demands advisors face, today it's essential to make maximum use of your workday.  To make that happen, Dan Richards says you have to overcome three common traps.

More articles below...



The SEC has proposed sweeping changes to the way commission-based advisors will be compensated for the services they provide.  Those changes will rename and modify the 12b-1 fees that many mutual funds now charge. To understand their impact, we spoke with Avi Nachmany of NY-based Strategic Insight, whose clients include the largest mutual funds.

At the request of many readers, Georg Vrba updated the model described in his article Improving on Buy and Hold:  Asset Allocation using Economic Indicators. The Economic Cycle Research Institute's (ECRI) U.S. Weekly Leading Index (WLI) and the index's annualized growth rate published on September 24, 2010, together with the most recent values of the other indicators he used, have been incorporated in the model.

Blogging is a modern-day marketing platform for cultivating client, prospect, and center-of-influence relationships.  A well-designed and properly structured blog, writes Stephanie Sammons in this guest contribution, can provide you with an opportunity to proactively manage your online reputation and attract new clients into your business.

Lastly, we highlight the most popular submissions to Market Commentaries.

We welcome guest submissions from our readers.  For more information, here are our guidelines.

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The Future of Oil

Since 2008, supply growth has outpaced demand.  New non-OPEC capacity, generally from projects initiated in 2004-2006, has come on-stream and OPEC production is running about two million barrels a day above its internal quotas.  Demand continues to grow in emerging markets, albeit at a slightly lower rate than it did before the recession. OECD (developed market) consumption, on the other hand, peaked in 2004-5, and it has been slipping ever since.

The Future of Oil

A Better Alternative - Natural Resource Equities

The Real Asset Strategies - Commodities vs. Natural Resource Equities White Paper, is a must read for advisors seeking to potentially protect clients from inflation, enhance diversification and improve risk-adjusted returns. This RS Investments piece examines how shifts in commodity fundamentals impact expected returns from passive commodity strategies, and then compares return streams and strategy attributes between commodity futures and natural resource equities.

A Better Alternative - Natural Resource Equities

Dodd-Frank Reform Bill and Amendments to the SEC Custody Rule

ByAllAccounts sat down with Barry Schwarz from ACA Compliance to get his perspective on the Dodd-Frank Reform Bill and Amendments to the SEC Custody Rule.  The link below is his presentation and it covers findings from our survey of over 500 advisors including facts about the cost of the surprise examination, and Barry talks specifically about how to interpret the Dodd-Frank Reform Bill what to expect from the surprise examination process, changes advisors should make as a result of the regulations and addresses specific questions from advisers.

Dodd-Frank Reform Bill and Amendments to the SEC custody rule - what do they mean for you?

Lessons in Ethics: The Incredible Story of Patrick Kuhse

After a story about the scandal appeared on ABC's Nightline on Thanksgiving weekend 1993, Kuhse fled with his family to Costa Rica to avoid an imminent indictment. After several years of dodging INTERPOL agents in the jungle, Kuhse finally turned himself in to U.S. authorities when he ran out of money.

Lessons in Ethics: The Incredible Story of Patrick Kuhse

Three Traps that Chew Up Your Day

If you block out time for high-priority items in your calendar, these activities are much more likely to happen.  In the process, you'll see a dramatic increase in the return from the time you spend on your business.

Three Traps that Chew Up Your Day

Unraveling the 12b-1 Debate

Nachmany believes the existing 12b-1 fees serve an important and valuable purpose, and he worries that the SEC's new proposals could cause many fees to be "externalized" - charged directly by advisors, and not deducted from a fund's assets - causing the cost of advice to increase.  We look at this claim and provide our own thoughts.

Unraveling the 12b-1 Debate

Improving on Buy and Hold: The Updated Signals

At the request of many readers, Georg Vrba updated the model described in his article Improving on Buy and Hold:  Asset Allocation using Economic Indicators. The Economic Cycle Research Institute's (ECRI) U.S. Weekly Leading Index (WLI) and the index's annualized growth rate published on September 24, 2010, together with the most recent values of the other indicators he used, have been incorporated in the model.

Improving on Buy and Hold: The Updated Signals

Building your Digital Identity through Blogging

Don't overlook blogging as a way to build your digital identity.  Your blog will be a digital asset that grows in value over time, while paying dividends along the way. 

Building your Digital Identity through Blogging

Highlights from Market Commentaries

Below are the three most widely read market commentaries during the past week:

An Interesting Week Ahead

The failure to reduce risk spreads in peripheral European countries means that the public sector bailout is not working. The list of industrial countries wishing to depreciate their currencies is not matched by a list of emerging economies happy to let their currencies appreciate significantly. As a result, foreign exchange tensions are mounting, and the price of gold has been driven to a new record level. This week will shed light on whether policymakers can do anything to deal with these two issues.

An Interesting Week Ahead by Mohammed A. El-Erian of PIMCO

Three Market Valuation Indicators

Doug Short presents historical overlay charts of three different valuation indicators: the real S&P composite regression to trend, the real P/E 10 adjusted to its arithmetic mean, and the Q ratio adjusted to its arithmetic mean. Based on the latest S&P 500 monthly data, the index is overvalued by 41 percent, 34 percent or 28 percent, depending on which of the three metrics you choose.

Three Market Valuation Indicators by Doug Short of Doug Short

Sequential Signals

The U.S. economy is still in a normal 'lag window' between deterioration in leading measures of economic activity and (probable) deterioration in coincident measures. Though the lags are sometimes variable, as we saw in 1974 and 2008, normal lags would suggest an abrupt softening in the September ISM report (due in the beginning of October), with new claims for unemployment climbing beginning somewhere around mid-October. If we look at the drivers of economic growth outside of the now fading impact of government stimulus spending, we continue to observe little intrinsic activity.

Sequential Signals by John P. Hussman of Hussman Funds

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