Week of July 30, 2007

The Markets
 
Ping-pong anyone?

The topsy-turvy market last week ended with major declines in the broad market averages. While the headlines looked scary, we have to keep in mind that the Dow Jones Industrial Average was coming off its all-time high set just the week before. Wall Street investors can be fickle! On the bright side, for the month of July, the Dow is only down 1.1% and for the year, it’s still up a respectable 6.4%, according to Yahoo! Finance.

It’s no surprise that tightening credit conditions, housing worries and inconsistent corporate earnings from some blue chip companies were touted as last week’s scapegoats, according to MarketWatch. Of the three, tightening credit might be the most worrisome.

The bull market that we’ve experienced the past few years was partially fed by low interest rates and easy access to credit, according to some analysts. As lending institutions become stingier in loaning money, it could reduce liquidity and stifle the volume of corporate buyouts. Up to this point, corporate buyouts have been one source of support for the stock market and if that dries up, we may need to find another catalyst to pick up the slack.

As in ping-pong, knowing the score during the game is important. However, what matters the most is the score at the end of the game and as long as you’re investing for the long term, then your game is still being played. And as your advisor, we continue to do our best to try to make sure the final score shows a “W” in your column.   

Source: Yahoo! Finance, Barrons Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly. Three-, 5-, and 10-year returns are annualized.  Assumes dividends are not reinvested.

BOLSTERED BY A FEW MEGA-GIFTS FROM MAJOR FOUNDATIONS, U.S. charitable giving reached a record $295.02 billion in 2006, according to Giving USA 2007, the yearbook of philanthropy published by Giving USA Foundation™. Specifically, Americans gave an estimated $11.97 billion more than in 2005, a 4.2 percent increase (or 1.0 percent adjusted for inflation) over 2005’s $283.05 billion. This was the third straight year with an increase in giving.

Richard T. Jolly, chair of Giving USA Foundation, notes that the increase in giving in 2006 is especially impressive given 2005’s previous record included nearly $7.4 billion in what he calls “extraordinary disaster relief giving.”

Now, if you guessed the Oracle of Omaha was one of the mega-donors, you’re correct. According to Giving USA, Warren Buffett gave away $1.9 billion in 2006, the first installment on his 20-year pledge of more than $30 billion to four foundations. While gifts of Buffett’s magnitude garner a lot of attention in the press, according to George C. Ruotolo, Jr., CFRE, chair of Giving Institute: Leading Consultants to Non-Profits, parent organization of the Foundation, Buffett-sized gifts accounted for just 1.3 percent of total giving nationwide.  

In fact, according to Ruotolo, about 65% of families with incomes lower than $100,000 give to charity, a greater percentage, he says, than Americans who vote or read a Sunday newspaper.

Collectively, these large and small gifts fund what Giving USA estimates to be America’s 1.4 million charitable and religious organizations. To ensure your own gifts have the maximum impact on causes you care about, we’d be happy to talk to you about planned giving.

YOU’VE PROBABLY HEARD OF THE INVESTMENT MAXIM, “Invest in what you know.” You may even be able to attribute it correctly to Peter Lynch, the legendary investment manager at Fidelity Investments. While Lynch’s assertion that it’s important to understand what you invest in is true, a recent study published by the University of California, Berkeley’s Haas School of Business calls into question whether “local knowledge” benefits individual investors. That is, researchers set out to discover whether what investors believe to be superior information on local companies translates into superior investment performance.
 
Analyzing almost 1 million transactions from more than 43,000 households, Haas Assistant Professor Mark Seasholes found that local stocks bought by individuals fail to outperform the stock market, suggesting that these investors had no superior information about the companies.

Interestingly, the working paper “Individual Investors and Information Diffusion” that Seasholes co-authored with Ning Zhu of the University of California, Davis, also reveals that the typical individual’s portfolio holds roughly 30 percent in stocks of companies located within a 250-mile radius of his home. According to Seasholes, that represents a significant over-weighting of local holdings given that, on average, only 12 percent of companies on the stock market are headquartered within the same radius.

Yet, local knowledge is a myth that may be difficult to debunk. Just think about how many corporate executives are overly invested in their company’s stock. Minimally, however, thinking about this behavioral aspect to investing can help encourage you to adopt a potentially beneficial broader worldview.
 
Weekly Focus – Don’t Touch That Bird…Or Egg
As a child, you likely heard someone tell you that if you touch a baby bird or a bird egg, its parents will abandon them. That’s an old myth, according to Frank B. Gill, former president of the American Ornithologists' Union as reported by Scientific American. So how did this myth get started? According to the article, “The myth derives from the belief that birds can detect human scent.” The fact is they can’t detect human scent. Like humans, birds are protective of their young so it takes much more than a simple touch by a human for them to give up. However, petting the youngsters or playing egg toss are still not advised!

Best regards,

Fredrick J. Livingston, CLU, CFP

Securities offered through LPL Financial, Member NASD/SIPC

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. 

* The Nasdaq Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

Brain Teaser Answer:  It contains the numbers one to nine, in alphabetical order.