International Investments and Your Portfolio

By John Moffat, Partner, Buena Vista Investment Management

With all of the discussion in the media about Greece’s financial situation and the future of the European Union we thought we might take a look at the global economy and how it will impact the future of your investments.

According to the World Bank, global economic activity measured by the gross domestic product (GDP) of 193 countries in 2010 totaled $63 trillion dollars. The GDP of the United States in 2010 was $14.5 trillion dollars.  To put that in perspective, the next three largest economies were China at $5.8 trillion, Japan at $5.5 trillion and Germany at $3.3 trillion.

Based on these numbers, the United States accounts for approximately 25% of all global economic activity and the other 192 countries make up 75% of economic activity. As long as we are looking at statistics, according to CNN, if we rank global corporations by revenue then Wal-Mart would be the largest company in the world but 62 out of the top 100 corporations are domiciled outside of the United States.

This means non-US economies account for 75% of all global activity and 62% of the top 100 companies are foreign.  Yet, I would venture to say that most investors have less than 25% allocated to international investments. If that is the case in your investment portfolio, you might want to consider increasing your allocation to international investments.  It would be our position that a well-diversified portfolio, containing a proper allocation to international investments will provide you with better investment returns over time.

According to Morningstar.com, over the last 10 years, large capitalization foreign blend mutual funds averaged a 5.5% return compared to 3.8% return posted by the average large capitalization domestic blend mutual fund.  Remember that these are average numbers.  So if you are managing your own portfolio and you have done the right amount of homework that performance differential could have been even greater.

If we want to get more region specific, according to Morningstar, Asian funds with a ten year track record posted a 12% annualized gain over that period of time.  A substantial improvement over  the returns provided by domestic large cap mutual funds.

Investing internationally is not without risk.  International investments have higher volatility characteristics than large capitalization domestic stock funds. As such, investors you must be willing to deal with higher volatility in order to achieve higher long-term returns.

Bottom line for investors is that we live in a dynamic, complex global economy.  There are investment opportunities all over the world and if the emerging economies of China, India and Brazil continue to move forward, the investment opportunities will also continue to grow.

Remember to tune in Friday, February 24th on WFHR at 10:30am  when we will be presenting our monthly radio show ”Investment Insights from Buena Vista.” Also please go to our website to stay up on our latest thoughts, buenavistainv.com

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Buena Vista Investment Management
241 Third Street South l Wisconsin Rapids, WI 54494
Phone: 715 422-0700

US COMPANIES OPTIMISTIC ABOUT ECONOMIC RECOVERY

By Joel Sullivan, Partner, Buena Vista Investment Management

United States companies are replacing aging equipment and even moving overseas production back from low-cost foreign markets. This is happening at the same time China’s growth is slowing and Europe is in a slump. This type of activity leads one to think America may be in a position to take a bigger role in the world’s economic recovery.

Carlisle Companies, a small conglomerate that makes insulation, tires and restaurant supplies, plans to open two new plants in the U.S. and bring tire production back to the U.S. from China.

Rising wages overseas, higher transportation costs and the shipping time of goods from China is what prompted Carlisle to move production to Tennessee from China. Additionally, strong domestic growth led to Carlisle opening new factories in Seattle and Kingston, NY.

After keeping investment in equipment and over-all costs way down for the past several years, many companies are expanding capacity to meet rising demand. United Rentals Inc., the world’s largest equipment rental company plans to raise its capital spending by about a third, to $1 billion, this year as more construction and industrial companies are likely to increase their demand for equipment like elevated forklifts and backhoe loaders. Cummins Inc., which makes engines for trucks and heavy equipment, is boosting its capital spending to more than double the rate of two years ago.

Companies have a lot of cash on their balance sheets currently, which is due in part to the fact that they have delayed purchases over the last couple years. Economists expect capital expenditures, or capex, to grow in excess of 10% this year. This is significant because capex and hiring go hand in hand. Additionally, if company CEO’s weren’t seeing increasing demand in the marketplace, they wouldn’t be so willing to commit dollars to capex.

Fortune Brands Home & Security Inc., whose products include Master locks and Moen faucets, recently increased spending plans for 2012 to $80 million, up about 17% from 2011. Chris Klein, the CEO, said, “ The economy isn’t off to the races yet, but it is definitely firming up.”

Although the recovery may be weaker than many would like, it appears we are starting to see signs of steady progress in capital spending and job growth.

Remember to tune in Friday, February 24th on WFHR at 10:30am  when we will be presenting our monthly radio show ”Investment Insights from Buena Vista.” Also please go to our website to stay up on our latest thoughts, buenavistainv.com

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Buena Vista Investment Management
241 Third Street South l Wisconsin Rapids, WI 54494
Phone: 715 422-0700

STOCK MARKET POSTS BEST JANUARY SINCE 1997

By Joel Sullivan, Partner, Buena Vista Investment Management

The Dow Jones Industrial Average gained 3.4% in January, which was the biggest January gain in 15 years. The average finished the month at 12,632. The S&P 500 ended the month at 1312, which was an increase of  4.4% since the first of the year. Besides being one of the best Januarys in many years, this past month exhibited much less volatility than we saw throughout most of 2011. Gone, for now, are those wild swings of 300 or 500 points in the Dow. Actually, in January we saw only two days where the Dow moved over 100 points, and those were both up days.  The VIX, which is a measure of volatility, dropped from 30 in December to 18 by the end of January.

This strong start to the new year isn’t limited to the US stock market. January’s advance in the MSCI All Country Index, which tracks stocks in 45 developed and emerging countries, is the best performance during any January since 1994, according to Bloomberg news. It appears investors are starting to become a little less concerned about a negative spillover from Europe to the US markets. The ECB has helped European banks by giving them access to capital through a 3 year loan program, and Greece is getting closer to coming to terms with its bond holders in order to avoid a default. Additionally, our Federal Reserve Bank seems to be encouraging markets by declaring that interest rates should stay extremely low for another 2 years.

Also, companies are beginning to report earnings for the 4^th quarter of 2011. For the most part, these number are coming in at or above forecast. The combination of the developments mentioned previously, good earnings and better economic data has helped push the US stock market higher. Consequently, we are seeing reports of strategists at the biggest banks up-grading their forecasts for 2012. A prime example is Larry Hatheway, the chief economist at UBS, who just two weeks after saying that investors should “remain cautious” raised his recommendations on global shares. Thomas Lee, chief equity strategist at JP Morgan, says the S&P 500 will probably climb to 1430 by the end of this year.

With such a strong January, this market may be poised for a pullback. Markets don’t go straight up. However, many on Wall Street believe such a pullback would only be a pause in this upward rally. Often times, how goes January, so goes the year in the stock market. 2012 could be another one of those positive years in the stock market led by a strong January.

Remember to tune in Friday, February 24th on WFHR at 10:30am we will be presenting our monthly radio show ”Investment Insights from Buena Vista.” Also please go to our website to stay up on our latest thoughts, buenavistainv.com

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Buena Vista Investment Management
241 Third Street South l Wisconsin Rapids, WI 54494
Phone: 715 422-0700

Tax Credits Help Working Families, Seniors

By State Senator Julie Lassa

The annual arrival of W-2 forms in the mail means that tax time is not far away. Many people coping with layoffs and reduced hours at work may not realize that their lower income could qualify them for tax breaks they may not have qualified for previously. The Earned Income Tax Credit (EITC) and the Homestead Credit are two such tax breaks specifically designed to help lower income working families or seniors on a fixed income.

Tax credits are different than tax deductions, because they directly reduce the tax you pay. Plus, you can generally claim these credits for past tax years, if you were eligible for them.

The EITC is a federal refundable tax credit. You may qualify if your earned income and adjusted gross income are both less than:

• $43,998 ($49,078 if married filing jointly) with three or more qualifying children;
• $40,964 ($46,044 if married filing jointly) with two qualifying children;
• $36,052 ($41,132 if married filing jointly) with one qualifying child;
• $13,660 ($18,740 if married filing jointly) with no qualifying children.

The maximum credit for the 2011 tax year is $5,751. A number of restrictions apply, so be sure to check out the IRS Web site at www.irs.gov/individuals/article/0,,id=96406,00.html, or see the instructions for Form 1040 or Form 1040A for more details. The IRS Live Assistance line is (800) 829-1040.

There is also a Wisconsin EITC. You qualify for it if you can claim the federal EITC and have at least one qualifying child, and it is based on a percentage of your federal EITC credit depending on how many qualified children you have. The maximum Wisconsin EITC for 2011 is $1,955.

Low-income Wisconsin residents who own or rent a dwelling may qualify for the state Homestead Credit. Your “homestead” is the Wisconsin home you occupy, whether you own it or rent it, and up to one acre of land adjoining it (or up to 120 acres of land if the homestead is part of a farm). A homestead could be a house, an apartment, a rented room, a mobile home, a farm, or a nursing home room. The Homestead Credit represents a portion of the property tax you paid, either directly or through your rent.

You may qualify for the Wisconsin Homestead Credit if your household income was less than $24,680 for 2011. The maximum credit for 2011 is $1,168. For instructions on determining your eligibility and calculating your credit, review the Department of Revenue website, http://www.revenue.wi.gov/individuals/homestead.html, or see the instructions for Schedules H and H-EZ. The DOR phone number for help with the Homestead Credit is (608) 266-8641.

Several human service agencies provide volunteer tax assistance to help you identify credits you may be eligible for. For help locating tax assistance in central Wisconsin, dial 2-1-1 to be connected with the United Way’s information and referral hotline. In south Wood County, call the Incourage Community Foundation at (715) 423-3863.

You should be aware that recent changes passed by the Republican legislature and signed into law by Governor Walker have reduced the value of these tax credits, and amount to a tax increase on low-income families and seniors. The maximum state EITC credit for low-income families with three or more children will drop $518 this year, and indexing changes to the Homestead Credit will cost individual taxpayers as much as $23 this year and as much as $57 next year. Since almost a third of those who claim the Homestead Credit are over 65, this tax increase will fall disproportionately on seniors.

I hope that you find this information about the EITC and the Homestead tax credits useful as the April 17 tax deadline approaches.

MUNICIPAL BONDS PROVIDE ATTRACTIVE TAX FREE INCOME

By Joel Sullivan , Partner, Buena Vista Investment Management

In 2011 the Barclays Municipal Bond index had a total return of 10.7%. While experts don’t expect such above average returns this year, they are still looking for total returns of 6-7%. Its because of these types of forecasts that PIMCO funds, which runs the world’s largest bond fund, boosted its holdings of U.S. municipal debt to the highest level in 5 years. This is also in stark contrast to a year ago when municipal bonds were getting a bad rap. States were having budget issues, Build America Bonds were being halted, and market analyst Meredith Whitney told 60 Minutes that there would be defaults totaling” hundreds of billions of dollars.” Obviously, this did not come to pass. The default wave didn’t materialize and munis staged an impressive rally as detailed above.

Total return figures of 6-7%  are a combination of interest and price appreciation. If we just look at the interest paid, that figure ranges from 2 – 3% for investment grade. One to two percent higher for non- investment grade muni bonds. This interest is normally paid every 6 months to individual bond holders or quarterly from bond funds. One of the primary benefits of muni bonds is that they are free from federal tax. This means that for investors in the 28% bracket, a 3% rate is the equivalent of 4.2% taxable. If you’re in the top rate of 35%, you would be earning a rate of 4.7% on a taxable equivalent basis.

According to Bloomberg news, municipal bonds is one investment where hiring a professional fund manager makes a ton of sense. Mutual fund companies have analysts to sort out the good investment-grade values, and you get the broad diversification that helps reduce default risk. There are a number of good funds out there. Morningstar research lists on their site several highly rated funds that yield from 3.35 to 4.25%.

With Federal Reserve Chairman Ben Bernanke announcing his intent to keep interest rates low until sometime in 2014, the higher yield from municipal bonds could be a very attractive place to be over the next year, or maybe longer.

Starting Friday January 27th on WFHR at 10:30am we will be starting our new radio show “Investment Insights from Buena Vista.” Also please go to our website to find out more information www.buenavistainv.com, or like us on Facebook to stay up on our latest thoughts.

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Buena Vista Investment Management
241 Third Street South l Wisconsin Rapids, WI 54494
Phone: 715 422-0700

WHAT TO DO NOW?

By Peter Brey, Partner, Buena Vista Investment Management

The market has started the year on a positive note. The S&P 500 is up almost 5%. Volatility has been very low as there has not been one day where the Dow 30 has risen by more than 100 points. In this environment it is easy to get bullish.

From 1982 through 1999 the best stock strategy was to buy stocks and hold on to them. The S&P 500 rose an average of 18% plus each year for 17 years. Maximum returns were amassed by buying good quality stocks or mutual funds and just maintaining these positions.

The returns from 2000 through 2011 have been very modest at best if you continued to just hold your positions. However, if you adopted a more active management style you would have garnered better returns.

So where are we going now? The economy will remain in a slow growth mode. The effect of cutting spending at the federal level has not yet taken place. These reductions will not stimulate the economy. Likewise, the current crises in Europe, is resulting in belt tightening in almost every country. These budget cuts will mean less purchases and less money circulating into the European economy. Asia will also be affected by Europe. All of this austerity will ultimately be bullish for the world economy as financial discipline will prevail.

Thus, there will be a return of volatility. Now is the time to review your portfolio and determine if it is the time to eliminate positions. If your investments do not have dividends, do you project that their growth is dynamic enough to overcome that fact? If you hold financials, is this a good time to reduce your holdings? Dodd-Frank, Volcker Rule and low spreads are still hurting their growth. It might be time to put some money on the sidelines to take advantage of the next downturn!

Starting Friday January 27th on WFHR at 10:30am we will be starting our new radio show “Investment Insights from Buena Vista.” Also please go to our website to find out more information www.buenavistainv.com, or like us on Facebook to stay up on our latest thoughts.

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Buena Vista Investment Management
241 Third Street South l Wisconsin Rapids, WI 54494
Phone: 715 422-0700

Can the US Markets Rebound In 2012?

By John Moffat , Partner, Buena Vista Investment Management

Political discourse and years of governmental fiscal mismanagement rocked the world’s equity markets during the second half of 2011 and wiped out all of the gains posted in the first half of the year. Unfortunately, the budget deficits in the US and Europe overshadowed positive economic news.

As we look to the investment environment for 2012, a good place to start our discussion is with Europe. Europe is beginning to implement policies that should improve the financial environment in the future. Fiscally conservative governments have been elected in Spain and Italy and a healthy discussion on solving Europe’s fiscal dilemma is occurring. Change may not be occurring as fast as many in the markets would like, but we expect the bond markets to force European leaders to make the necessary tough decisions.

If we looked at fundamentals alone, the U.S. equity markets would likely be higher than current levels. If and when the European fear is removed, or even significantly reduced, then that should pave the way for a nice rally in US stocks in 2012.

If Europe improves, investors are likely to bring their focus back to economic fundamentals and there are a number of positive trends developing in the US. First, the stage has been set for unemployment to come down in 2012, as unemployment claims have dropped to a 3 ½ year low. The nation added 100,000 or more new jobs every month since July and over 1.4 million jobs during the last year.

Additionally, housing starts are at their highest level since April 2010. Consumer confidence numbers from the Conference Board continued to improve in November and December. Retail sales are expected to be up over 8% compared to 2010 and we have the US Leading Economic Index moving to new highs in December. Finally, US corporations in the S&P 500 are on pace to post record profits this year and their balance sheets are as strong as they have been in many years.

We also have a stock market that is undervalued compared to historic norms. The forward price to earnings (P/E) ratio based on 2012 earnings estimates for the S&P 500 is 11.4. This is below the historic average of 15.6, which suggests the S&P 500 may be 27% undervalued. The same holds true for other fundamental indicators, such as Price to Book, Price to Cash Flow and Price to Sales; they are all pointing to an equity market selling below historic norms.

So as we look to 2012, it is important to look past the negativity often displayed in the media and remember that emotion can be the enemy of sound investing. In these uncertain times it is important to focus on the facts. The US economy is improving and the Asian and Latin American economies are growing. Europe is working to solve its problems.

Under these conditions our forecast for next year is that the S&P 500 should rise to a level between 1350 and 1450. However, don’t expect a smooth ride as European and other headlines can cause world markets to move up and down on a short term basis. But ultimately, fundamentals will matter and things like corporate profits and valuations should be reflected in higher stocks prices during 2012.

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Buena Vista Investment Management
241 Third Street South l Wisconsin Rapids, WI 54494
Phone: 715 422-0700

2012 STOCK MARKET IN REVIEW

By Joel Sullivan, Partner, Buena Vista Investment Management

We experienced a lot of volatility in the stock market in 2011.  As we begin a new year, it seems appropriate to look back on some of the ups and downs we saw in the market last year. There were several major themes in 2011. One of those themes would be the amount of volatility. As I talked to people during the year, I often heard them say how bad the stock market was lately. Some of them talked about how frustrated they were with the market because” it keeps going down.” Now that the year is behind us, let’s examine the facts behind these investor sentiments. The nice thing about year-end reviews is that we have the advantage of perspective. When we are in the middle of a situation or event, our emotions can often dominate. Looking back, we can focus more on facts rather than feelings.

When we refer to the stock market, for this article, we will be referencing the S&P 500. So how bad was the stock market in 2011? We actually had 3 somewhat distinct markets in 2011 in terms of performance. From January through July 22^nd the S&P 500 was up 7%. Then from July 23^rd through October 3^rd the market was down 18%. And from Oct 4^th  to the end of the year the market was up 14%. Obviously there were a number of major moves in the market last year, but what may not be so obvious is that the S&P 500 started the year at a level of 1257 and it ended the year at 1257. Exactly the same place it started, with a net gain/loss of zero. I suppose you could say that we had a bad market last year, but 0% isn’t too bad as a follow up to +23% in 2009 and +13% in 2010.

Regarding the other sentiment that” the market keeps going down”. Let’s look at the facts. Since 2003 the stock market is up over 38%.

One more fact that may surprise you. Of all the major stock markets around the world, such as the British market, the German market, the Hong Kong market, etc… the best performing market of the group for 2011 is the United States market.

So why is investor sentiment relatively negative. One possible reason is volatility. For example, in August of last year the Dow Jones Industrial Average dropped 500 points not once, not twice but 3 times during the month, including a 635 point drop on August 8^th.  These were the largest, but there were additional major down days in the market during 2011. So even though the S&P 500 finished even for the year, it is easy to see why the average investor may have a negative view of the market.

So, what can we learn from 2011?  As an investor, it is difficult to make money if you react to day to day volatility.  That is not to say you should never change your investment portfolio. However, when deciding to make changes keep in mind that your likelihood of success is greater if you take a medium to longer term view of the market. And make decisions on facts, not emotion.

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Buena Vista Investment Management
241 Third Street South l Wisconsin Rapids, WI 54494
Phone: 715 422-0700

WHERE IS THE YIELD?

By Peter Brey, Partner, Buena Vista Investment Management
In 2007, an investor could easily get 4-5% in one year to three year certificates of deposits and government bonds. These rates on a $500,000 fixed income portfolio generated income of almost $25,000. Retired people used this income to pay off budget items or for discretionary purchases. Today, a similar portfolio of government bonds and certificates of deposits might generate only $2000-$3000. The giant reduction in this income stream has put many seniors in difficult situations. Do they cut back on their spending or do they begin to spend their principal? Neither of these alternatives is very attractive. The pursuit of income is going on worldwide. I believe that this search may go on for at least the next two years. The Federal Reserve is on record that they intend to leave the fed funds rate at 0% at least into 2013. The Federal Reserve is also using their proceeds from the bond maturities in their portfolio to buy long bonds (10-30 years). The result of that strategy is that the yield on long bonds will probably decrease or minimally, stay at the current returns. Yesterday, ten year treasuries were returning 1.86% and thirty year treasuries were yielding 2.92%. Therefore, investments in long bonds are extremely aggressive as the return does not merit the length of time an investor must tie up their money.

So the question becomes what type of assets should a person invest in, in order to get back to 4-5% interest rate returns? Currently, Buena Vista is investing in three types of investments generating income returns from 2.5% to 9%. These areas are corporate bonds with maturities of 1-3 years, preferred stocks and dividend yielding common stocks.

The Europe situation has led to an increase in the current yields of corporate debt as investors have sold corporate bonds. These bonds are similar in structure to certificates of deposits and government bonds. They have a stated interest rate and the y come due on a specific date. The strategy is to buy these bonds so that the investor has maturities in 2013, 2014 and 2015. The current yields are 2.5% to as high as 5%. The bonds are rated investment grade which is the highest rating of safety given out by the rating agencies.

Preferred shares are issued by corporations as part of their capital structure. These shares have yields which are similar to bonds but trade on exchanges like stocks. The current rate of income returns are 6% to 9%. They pay the same distributions on a quarterly basis. Maturities on these instruments vary. Some preferred shares never mature. Other issues have a date where the company can buy them back at a stated price. The fluctuations in the current price of preferred stocks are greater than bonds.

Finally, the last option is dividend paying common stocks. During the volatility of this year’s stock market, the stocks that held up the best were ones which were yielding greater than 3% in dividends and that had a record of increasing that dividend every year. Utilities, REITs, Master Limited Partnerships, Drug Companies and Consumer Staple Companies all have these characteristics.

If you would like advice on how to increase your income stream, please give us a call at Buena Vista for a free consultation.

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Buena Vista Investment Management
241 Third Street South l Wisconsin Rapids, WI 54494
Phone: 715 422-0700

STOCK INVESTORS MAY BE TOO FOCUSED ON THE SHORT TERM

By Joel Sullivan, Partner, Buena Vista Investment Management

The widespread pessimism regarding the stock market and economies around the world is fully understandable. However, it may be clouding people’s vision about potentially huge opportunities, especially for young investors.

Most everyone knows the old stock market adage to “buy low, and sell high”. Warren Buffet puts it another way, “ be greedy when others are fearful, and be fearful when others are greedy”. Yet few have the courage to buy low, because that is when fear is the highest. With prices low, and fear high, this may be an excellent opportunity for long term investors to put money into the stock market.

Many investors nearing retirement have seen their net worth decline due to the drop in the stock market since 2007. There is real pain associated with the fact that stock prices are significantly lower today than they were 4 ½ years ago. That rear-view mirror approach should be totally irrelevant to young investors, and even to the astute, mature investor.

When evaluating investment opportunities, it is important to look beyond the current environment and even beyond the next several years. Many times people focus on “hot” stocks that they hope will give them large immediate profits. However history is full of companies that may not sound exciting, but have provided great long term returns to investors. Johnson and Johnson is one example, but there are many others. J&J doesn’t make cool techno stuff. It doesn’t make stuff with touch screens. It makes band aids and Tylenol and moisturizer, etc… However, if you bought $10,000 of J&J twenty years ago, it would be worth about $100,000 today. And, in addition to that, you would have received 3.5% per year in dividends. Not bad for a boring company. Not every year over that time period was positive for the stock, but patient investors were rewarded handsomely for sticking with the company.

There are likely to be many similar rewarding companies like J&J over the next 20 years. A “growing rich slowly” approach might be less appealing than seeking quick returns, but it is often a more reliable way to build wealth. To many investors, the recent volatility in the stock market can be frightening. It is often an excuse for avoiding the market altogether. However, I would encourage you to look at drops in stocks as a long term buying opportunity. Look beyond today, and beyond next year and focus on “growing wealth slowly” with regular systematic investments into solid, well run companies.

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Buena Vista Investment Management
241 Third Street South l Wisconsin Rapids, WI 54494
Phone: 715 422-0700