Know Thyself

What is the difference between investment and speculation?

Many practitioners have considered this question. Is it the time frame? The instruments? The actors? In our experience, the line is clear: the difference between investment and speculation is internal versus external orientation. Investment is a reflective exercise, and begins by asking yourself what your goals and limits are. Speculation is an external activity, and begins with a search for profits.

So an investor begins by formulating a plan. A speculator looks for a hot tip. An investor can often handle a setback in stride. A speculator frequently gets discouraged if things go wrong and wants to bail out. Investors are usually in things for the long haul. Speculators are here one day and gone the next.

The ancient Greeks knew that wisdom begins with self-understanding. Call it the ant and the grasshopper, the tortoise and the hare, or whatever. In the long run, investors usually end up with what they need-because they’ve taken the time to know what they need.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Hard Labor

How is labor faring in the auto industry’s troubles?

The administration has taken an active role in the negotiations between creditors, management, and the unions. In Chrysler’s case, the union seems to be getting a bigger share of the company than the secured lenders. A win for Labor, right?

Well, in the short run, yes. But who’s gonna lend to industries with politically powerful unions, now? There are lots of industries-from newpapers to airlines to heavy machinery-that need capital to update their operations. When politics can preempt indenture agreements, investors will just stay home.

Union membership has been declining since 1954 until today, declining from 28% to a mere 7% of the non-government workforce. By penalizing investors in the few companies that support labor unions, that decline will only accelerate.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

A New Calculus for Housing

When I studied math, I understood how to calculate the slope of a line, but its curve? That was confusing.

My teacher called it the “second derivative.” And it was important, because it told you which way the slope was changing. When the slope was down but the second derivative was positive, then the line was curving up. Eventually, the slope would be positive.

That’s where we seem to be in the housing market. The latest figures show that prices are still falling around the country. But they’re falling less intensely. And in some places they’ve stabilized.

This is important. If prices have stopped falling, a lot of home-buyers will take advantage of generational lows in mortgage rates to secure housing. And since we haven’t been building as many homes now as we need to satisfy new household formation, the inventory of unsold homes could evaporate quickly. After that happens, price increases are inevitable. And the banks can safely start lending again.

Before a market can recover, the second derivative has to turn positive. The recent positive curve factor in housing could change to positive moves in pricing before you can say “Isaac Newton.”

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Relational Finance

Most financial managers try to practice rational finance, where emotions are removed from the investment process. But at Charter, we practice relational finance as well.

Relational finance is when you invest in such a way that you don’t have to worry about the future. It means that you don’t dread the arrival of your next statement in the mail. It means that long-term goals are managed, not only by squeezing out more return, but also by managing your expenses. It may not maximize profits, but it sure improves returns.

I recently advised a couple clients who want to share their good fortune with friends and family. By structuring investments so their current and future needs are met, and by establishing a consistent plan for making gifts, we’re able to give them a way to share generously without impoverishing themselves.

Relational finance sometimes means owning a safe and boring bond when a high-flying stock could yield more. But if the bond meets your needs and you can sleep at night, the relational approach is actually the most rational as well.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

In Memoriam

Happy Memorial Day!

Formerly known as Decoration Day, Memorial Day commemorates the men and women who have died in battle while serving our country in the military. First enacted to honor Union soldiers after the Civil War, it was expanded after World War I to include soldiers killed in all American wars. Now notable as the unofficial start of summer and the running of the Indy 500, we do well to remember those who served and died on this day of barbeques and softball.

Without the brave sacrifices of our servicemen and women, the United States would not be a leader in free-market thinking. It is the freedom of our markets, in place since the founding of the Republic, that is the source of our prosperity. And it is these sacrifices, during wartime and otherwise, that preserves that freedom.

So remember that whether you decorate a graveside or a hot dog. The price of liberty is eternal vigilance. And thanks to all who have served.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

First Aid

When I was a Boy Scout, I earned the First Aid merit badge. In an emergency I learned that one of the first things to do is stop the bleeding. And one of the best ways to stop the bleeding is to apply pressure directly to the wound.

That’s why there’s no imperative to fix health care right now. There’s no pressure on consumers, providers, or the government to change things. Even though it’s been estimated that Medicare as currently configured amounts to a $100 trillion unfunded mandate, no one seems worried except green eyeshade types and policy bores. We always assume that Uncle Sam will somehow have the cash when we need it.

But it’s been my experience that when the accountants say something is broke, it’s broke. And wishing won’t fix it. So any solution to health care costs has to make consumers and providers feel pressure every time they spend money on health care. If we let up on that pressure, the bleeding will just continue.

If a patient keeps losing blood, he weakens and dies. Applying pressure now might help us avoid having to use more severe measures later on.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

California Here We Come?

In The Grapes of Wrath a hard-bitten Oklahoma family heads for California to escape the Dust Bowl and the Depression. When they get there, times are still tough.
On Tuesday California voters rejected a revenue initiative designed to save the state’s finances. The resulting budget crisis could lead to insolvency. Since the state doesn’t have the ability to print money, they can’t fake their way out of this mess.

One option is to go to Uncle Sam for a bail-out. The political calculus is simple: rescue a critical, reliable constituency and cement the relationship, as the administration seems to be doing in Detroit. But the implications are huge. Once one municipal issuer is supported, there’s a strong indirect guarantee to every governor, mayor, and school board. If one overspending locality is saved, how can the Feds say no to anyone?

The straightforward path after that is to explicitly guarantee the debt of every municipal issuer in exchange for strict controls on how the money is spent. And sic transit Federalism and the Constitution. As a proud “Live Free or Die” resident, I hope it doesn’t come to that.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Inside the Box

Often businesses are rewarded for thinking outside of the box. With Wal-Mart, it’s inside-the-box thinking that matters.

Wal-Mart sales have been improving due to “downscaling,” where people who usually shop at Tiffany’s shop at Kohls, and Kohls buyers shift to Wal-Mart. Since Wal-Mart’s efficient operation allows it to be the low-cost leader, there’s not a lot of places for people to go downscale from Sam’s Club.

But what happens when things get better? Do customers migrate back? Wal-Mart has been working hard to see that that doesn’t happen. From electronics to prescriptions to apparel, the Bentonville retailer has been adding features and convenience to keep the increased traffic from evaporating.

Inside-the-box thinking usually pays off: care about your customers, treat your employees well, watch your expenses. With Wal-Mart upgrading itself, it’s less likely that its new customers will upscale away.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Bair Market

Sheila Bair is on a tear.

The FDIC chair recently noted that some bank managements will have to go. She obviously wasn’t talking about banks that have nothing to do with the TARP plan, or banks who are rushing to pay back the money because of what Wells’ CEO Kovacevich called the Government’s “asinine” attitude. No, it would have to be Bank of America and Citigroup, the poster-children. And their Boards as well.

Although the FDIC has since issued “clarifications,” Bair’s signal came through loud and clear: you big banks messed up, and we’re taking it out of your hides. By scapegoating the big banks, Bair both ignores and re-writes history: the financial crisis was foisted upon us by greedy bankers. Fire them and the problems will be solved. That might be true, except for the errors of consumers, Congress, investors, the Chinese, the Fed, the press, and-oh yes-even regulators. You gonna fire all them too, Sheila? Sheila?

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

The Wizard

Is Washington really the Land of Oz?

President Obama got a lot of health care “leaders” together to commit to keeping health care costs from rising. His announcement raises several questions:

1. Costs compared to what? Since we don’t know what future costs are, how can we know if this commitment saved any money? 2. What’s gonna reduce the costs? Will doctors and nurses take a pay cut? How then will we attract new health care workers? Will insurance and drug companies forgo their profits? Then how will they attract new investment capital? 3. Is evidence-based health care new? I thought that’s what the science of medicine has always been about.

In the Land of Oz, all Dorothy has to do is click her heels three times and say “there’s no place like home.” Unfortunately, President Obama’s health care proposal makes him look like the man behind the curtain.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net