Watch Your Pennies…

By Stan Koopmans, Senior Vice President – Business Relationship Manager

Watch your pennies, and your dollars will watch themselves. Watch your dollars, and your hundreds of dollars will watch themselves. Watch your hundreds of dollars, and your thousands of dollars will watch themselves. You get the idea.

The Penny Rule Makes Business Sense

I remember when I first heard the “Penny Rule” as a small boy, I thought it would be a good practice with my personal finances. After all, I was just starting to earn money as a paper boy.  A short time later, I realized the greatly expanded application of the Penny Rule during a conversation with my dad.

Driving home from a farm auction we attended, I asked, “Why did that farmer need five hacksaws?” My dad explained that the farmer didn’t need that many hacksaws, but that he didn’t keep track or take care of his tools. So when he needed to use a tool  – a hacksaw, for instance – he would just run to town to buy another. In other words, he didn’t watch his business, and because of squandering and wasting money over the years, it ended with him having to sell out in a farm auction due to too much debt.

I don’t remember what my dad bought at the auction that day. What I do remember is realizing that the Penny Rule had applications to the business world, as well.

Good Examples of The Penny Rule

It has been many years since I first heard the Penny Rule, but it still holds true. As a long-term commercial lender I have had the privilege of observing numerous great managers and owners watch their pennies when leading their businesses. For example, I have an existing customer that needs several expensive specialty tools (much more expensive and complicated than hacksaws) on job sites scattered throughout the Midwest. Every tool has its assigned place on peg boards at the main office and must be signed out. As a result, tool costs are controlled, and time and money aren’t wasted searching for existing tools or buying duplicates.

Another way to watch pennies add up is energy costs throughout the year. Money and energy saving considerations can include:

  • Occupancy sensors that shut off lights in rooms that are not being used
  • Timers that turn the heat down during the night and back up again early in the morning
  • Fuel-efficient vehicles
  • Door closers
  • Heat tape
  • Solar panels
  • and more!

Going Overboard

Can frugality be carried too far?  Absolutely. Like most everything in life, balance is essential!  If taken too far, penny pinching can be considered extreme (even bizarre) with no real buy in except for ridicule from observers and participants.

Two examples from my days as a bank examiner come readily to mind.  A former co-worker would stop his car along the road to pick up one aluminum can because there was a 5-cent rebate. Another example happened when reviewing the official minutes of a bank’s board of director meetings. Only every other page made sense because the minutes were kept on the back side of “used” paper.  This was also the type of paper they loaded into the copy machine.

So I hope you think of ways to watch your pennies, tens, hundreds, and thousands of dollars, but with proper moderation!

Member FDIC

The Importance of Asset Allocation: Finding the Right Investment Mix for Your Account

2013 has been an excellent year so far for investors, with the S&P 500 up over 23% and the Dow Jones up nearly 19% as of the end of October. Despite this outstanding performance, we have also seen periods of significant volatility this year and over the past several years since the beginning of the “Great Recession.” Most recently, the government shutdown, talk of an end of the Federal Reserve’s stimulus program, and concern about rising interest rates have caused volatility in both the equity and bond markets during the past few months. These periods of volatility can cause significant concern in investors, and highlight the importance of a basic investing concept: Asset Allocation.

Asset Allocation is the mix of stocks, bonds, and cash equivalents in an investment account. The mix is determined through an evaluation of an investor’s goals, tolerance for risk, and investment time length. The goal of the process is to determine the appropriate percentage to be allocated to each of these asset classes to balance the amount of risk that an investor is willing to take with the return potential of the portfolio.

More simply stated, an investor’s asset allocation should provide the investor with an investment mix that provides investment returns with a level of risk and fluctuation that you are comfortable with. For example, an investor who is uncomfortable with large declines in their portfolio’s value should have an allocation with a significant percentage of investments in less-volatile bond investments rather than the more risky and volatile equity investments. Alternately, an investor who is comfortable with such fluctuations may have a larger allocation to stocks in their accounts.

Having the proper asset allocation in your accounts can provide some peace of mind for you as an investor. If your investment mix provides returns with fluctuations that you are comfortable with, you should have less concern during short-term periods of volatility that are almost certain to happen over the course of a year.

If you are unsure about what the right asset mix is in your own accounts or if you have been uncomfortable with the up and down volatility in your portfolio when you’ve opened your account statements this year, it is a good idea to discuss this concept with your Wealth Manager or Financial Advisor. Year-end is a good time to review your goals and investment mix to ensure that your current portfolio is right for you.

The Sequester and Beyond

February was generally a good month for the markets, with most U.S. markets adding to their existing gains so far in 2013. Bond markets ticked upward and erased a substantial portion of the small losses incurred in January. The Dow Jones finally reached the 14,000 mark once again and flirted with all-time high levels that were reached prior to the ‘Great Recession.’

Despite these positives, the more concerning news item is the lack of a deal to avoid the automatic spending cuts brought on by reaching the extended ‘fiscal cliff’ deadline. Passing the deadline without a deal means the implementation of the ‘sequester cuts’ that reduce spending for national defense, Medicare, and other Federal budget items. Though the overall amount of the cuts of $85 billion is small relative to the $3.55 trillion Federal budget, the continued partisanship and unwillingness to negotiate is the more problematic issue. Another deadline is looming at the end of March, when lawmakers have until March 27 to reach a deal to authorize funding to keep the government funded and running for the rest of the year.

The good news is that the markets have generally shrugged off this missed deadline. Market momentum has continued upward and the Dow reached a new all-time high in early March. Some economists feel that the economy and markets will strengthen further once we have passed all of the self-made deadlines in Washington on the various budget and fiscal policy issues that are currently up for debate. The sequester cuts may have a slowing effect on the already fragile economic recovery, but there are expectations for some strengthening in the second half of the year. Passing each of these deadlines in Washington removes some uncertainty from the markets, and that typically leads to good market performance.

That does not necessarily mean that we are in the clear when we finally pass all of these deadlines, as persistently high unemployment remains a concern and corporate earnings continue to be mixed. The Federal Reserve has already sparked some concern that their latest stimulus program might not last as long as previously anticipated, which could be problematic if inflation increases before a there is a substantial decline in unemployment.

Despite these concerns, if Congress and the President can reach a deal prior to the next fiscal deadline, the certainty provided by a deal could provide some momentum that bolsters market returns and hopefully leads to a strengthening economic recovery as we move through the rest of 2013.

The Official Start of QE 3

The Federal Reserve officially announced the start of their third stimulus attempt on Thursday, prompted by a disappointing employment situation and a persistently slow economic recovery here in the United States. While the move was generally expected by economists and the markets, there are some interesting items to note in this round.

The Fed will immediately begin to buy $40 billion of mortgage-backed securities per month, and put no specific end date on this program. The previous two rounds of quantitative easing had finite durations in terms of an amount, so this round of stimulus is a strong commitment by the Fed to do what they can until the employment situation improves.

We will have to wait and see whether this third round will have a significant impact on the economy. Investors happily greeted the news, with the markets jumping substantially following the announcement. The bond buyback is meant to lower long-term interest rates, making equities a more attractive investment option. The buyback also should help the housing market through the purchase of mortgage-backed securities. Like unemployment, the housing market has been very slow to recover from the recession despite showing some signs of life in recent months.

The Fed also extended its expectations for how long the short-term interest rates will be held near zero until mid-2015. While this isn’t particularly surprising to some economists that have been predicting a similar time frame for the last year or two, it is certainly indicative of the Fed’s belief that the economic recovery can still be expected to be an even longer, more drawn-out recovery than we have already expected.

Corporate Earnings and Economic Strength

This has been a high-profile week for corporate earnings, with highly anticipated reports from Apple, Caterpillar, McDonald’s, AT&T, UPS, and the first ever earnings report from Facebook. The results were mixed, adding to the common trend of an uncertain earnings season.

What does this actually tell us about the strength of the economy and future market performance? In regards  to the markets, we saw disappointing results from tech giant Apple virtually shrugged off by the markets as a whole as part of a substantial rally in the second half of the week. The individual stocks in question have been directly impacted, both positively and negatively, as you would expect. As part of the big picture, however, the markets are seemingly more concerned with developments in the ongoing issues in Europe than with earnings reports for even the largest, most significant companies.

As a whole, however, earnings season has been a bit more concerning. After a few years of companies generally reporting great earnings and revenues, the results for even the best-performing companies have been more disappointing, with many reporting disappointing revenues or cutting their future outlooks for revenue and profit. This suggests an expectation of future lagging in consumer spending in an already slow and drawn-out recovery from the recession.

Still, the markets generally seem to be less concerned about this trend than European news so far, but it is certainly something to pay attention to in future quarters.

The Effect of Declining Gas Prices on the Economic Recovery

A few months ago, we discussed the possible negative effects of rising gas prices on the economy as oil and gas prices were rising rapidly in February. As many economists and experts were predicting a summer of reaching $5 per gallon of gas, there were significant concerns that consumers and households would be putting an increasing amount of money into their gas tanks instead of buying goods and services. Now that Memorial Day weekend and the unofficial start of summer are behind us, the numbers paint quite a different picture.

Oil dipped below $87 dollars per barrel on Thursday, and prices have fallen over 17% just in May. Gas prices have declined as well, but at a much slower rate than that of oil. Talk of $5 per gallon gas has subsided and we seem to be headed for a summer of less expensive gas.

What are the reasons for the decline? Tensions with Iran have eased, and U.S. consumption of gas has declined, while domestic production has increased. As alternative energy sources like natural gas and ways to utilize them become more developed, these sources have begun to offset some of our dependence on foreign oil.

This is very good news for the economy. Consumers not only have money to spend instead of putting it in their gas tanks, but they also may be more inclined to do even a modest amount of travelling this year. $5 per gallon gas would likely have limited many travel plans as well as discretionary spending, so this should help support our economy. If oil prices continue to fall, the benefits will be increasingly significant. An economic strategist recently theorized that every $20 per barrel decline in the price of gas could equate to a 1% increase in GDP, strengthening the economy and hopefully keeping some stability in the U.S. in light of the instability in the Euro zone.

The recent decline of oil certainly isn’t a sure bet to continue over the entire summer, as an issue in the Middle East or hurricane season could certainly trigger a spike in the price, but for now, let’s all enjoy our declining gas prices.