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2014 – 2nd Quarter – Market Highs and Security

July 17, 2014

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Dear Friends and Clients,

We usually save our market commentaries until the end of the letter, but with the Dow, S&P and the Transports making all-time highs, we decided to address the future first.

The World According to Pitt & Dan…

We like the low interest rate, slow but steadily growing economic environment the world has found itself in. It offers very little opportunity for recession. Corporations have refunded their debt at lower interest rates, culled out their workforces and shortened lines of distribution. The companies we own are in great shape. This is not the kind of environment that spawns a recession and without a recession it will be very hard to have a bear market (a correction of 16% or greater). We see the near term potential for secondary corrections (5-10%), but we just don’t see a recession-sponsored bear market on the horizon.

We were long stocks in the “really like” or “love” mode since 2008. The first quarter of 2014 saw this emotion change to “like.” For us, “like” means exactly that…. we like equities. The “love” groove finds us more open to buying growth stocks, stretching asset allocations, investing with momentum and getting comfortable with small cap situations. In the “like” mode our equity profile is more value and dividend growth oriented, favoring the unloved sectors, definitively large cap and somewhat more conservative in asset allocation. Our historical work tells us that the annual returns generated by the Dow and S&P have gone up 70% of the time. If you make the same calculation using 2-year trailing returns the investor’s success ratio increases to 75%. This number increases to 100% when you graduate to 10-year trailing returns. This train of thought has delivered us to the conclusion that equities always deserve to be a part of our clients’ portfolios. As you have heard us say many times before, “The long term is the only term.”

So with all that being said, what are we doing with new money these days? Once an asset allocation is set for the client, we build the equity section of that portfolio with value-oriented large cap, dividend-growing stocks. At the current time our asset allocations are full to their equity target. A 75/25 balanced account would in fact have a 75% exposure to equities. As market sectors become unloved by the market, we would expect to warm to them. In the event of a global terrorist event, significant economic deterioration or unforeseen political challenges….we would consider reducing our equity exposures. However, we have no affection for fixed income at the current time and cash pays nothing….we have been hard pressed to come up with an acceptable safe haven.

Our lives have always been full of perplexities like this and probably always will be. The answer generally lies in diversification and serious equity research. At the current time, our composite performance has been excellent. In order to be conservative when the market is fully priced or aggressive when the market is oversold, that will change. From time to time we will be heroes, and inevitably we will be chumps. The short term tendencies of our clientele seem to have waned over the last few years and most have recognized the value of long term thinking. We probably won’t be able to fall in “love” with equities again until a significant correction occurs. Be careful what you wish for…you just might get it.

Successful markets like to climb a “wall of worry,” which they seem to do 70% of the time. The wall is made up of single economic, political, or geopolitical events that one would expect to affect investor sentiment. Experienced readers of this letter know that we separate news events into two categories… knowns and unknowns. Markets do not like unknowns and adjust fairly quickly to knowns (the wall of worry). At the current time, the most significant known is the market’s own success. Investors and pundits become uneasy with higher prices and find themselves hoping for a correction….they occur about 30% of the time. Hoping for a correction reminds us of the country song lyrics, “Everybody wants to go to heaven…but nobody wants to go now.” We are fine with “like” and would expect the condition to persist for some time.


Identity theft, stolen credit card numbers, and other financial frauds seem to be commonplace in today’s news. Major companies like Target and eBay have suffered data security breaches that affected tens of millions of customers. When you hired P&A to manage your investments and advise you on your financial affairs, you probably assumed that there were safeguards in place to keep your financial data secure. There are really three levels of security working on your side: our measures, your custodian’s efforts, and regulations set for the industry. Here’s a deeper look at each:

P&A level security – Whenever we receive an email from a client requesting a money transfer, IRA distribution, change of address, etc., it’s our practice to call and verify the request directly with the client. Anyone who’s had an email account for some time has probably received an email from an account that’s been hacked. Additionally, we monitor cash movements into, out of, and between client accounts on a daily basis. When you write a check, know that we are paying attention to it. If anything looks new or out of the ordinary, we’ll pick up the phone and call the client to discuss. History has taught us that client contact goes a long way in preventing fraudulent behavior.

We recently changed software vendors, which we wrote about in our June e-newsletter. One of the big benefits of our new software is that it will reconcile our client accounts to the custodian (Schwab) daily. Prior to this improvement we reconciled 12 times a year at month-end. This should allow us to catch any suspicious activity more quickly. We do an investment committee performance review on all of our accounts every quarter and again when assets are deposited to, or withdrawn from an account. That means all of our accounts have eight sets of eyes on them every 90 days. In addition to performance we use these meetings to monitor liquidity needs, verify our last contact with the client, check asset allocations and discuss goals and objectives. If an account fails to generate the returns we think it should (too high or too low), we respond. Client contact produces a greater level of security.

Last but not least, we are a group of financial planners… that’s how we think. As a result, we pay attention to things like the necessity of trusts, account plating, beneficiaries, tax loss carry forwards, estate planning, and liquidity needs. We are not happy unless all the cogs are meshing. This approach reduces costs, improves performance and once again…heightens security.

Custodian level security – Charles Schwab is the custodian for most of our clients. They are in charge of safekeeping your assets, collecting dividends and interest, settling trades, and issuing you monthly account statements. P&A does not benefit from any of this account activity; we have the same relationship with Schwab that we have with the HyVee store down the street. Our clients pay Schwab through commissions and benefit from the many processes and safeguards they have put in place to protect their assets.

All clients should be aware that Schwab monitors client signatures very closely. If your signature has changed due to aging, health issues, or by artistic license, it’s wise to update Schwab’s records. Our office will be happy to help you with that. The smallest of change in your signature can motivate Schwab to call seeking validation, sometimes interrupting liquidity needs. Your custodian will always require a signature when money is being moved between accounts of different names. They are restricted to same name to same name activity without written authorization. Remember this if you need to wire funds for a real estate closing, philanthropic gift, or the settlement of any large purchase.

The Target credit card fiasco brought identity theft and credit card security to the forefront during the most recent holiday shopping season. Clients should expect cards with imbedded chips, random number passwords and perhaps cell phone validation in the not too distant future. Hackers tend to be bright, resourceful and dynamic. We will depend on Schwab to continue to protect their website and our/your financial affairs.

The Securities Investor Protector Corporation (SIPC) was created in 1970 to effectively protect investors from the financial failure of a broker-dealer, similar to the FDIC’s role in banking. SIPC provides investors with $500,000 of insurance (including up to $250k for cash) to protect against the loss of cash and securities held by a customer at a financially-troubled SIPC member firm. This covers most customers of failed brokerage firms when assets are missing from customer accounts. In addition to SIPC insurance, Charles Schwab has purchased excess SIPC insurance from Lloyd’s of London to add an additional $150 million in protection (up to $1 million in cash) once SIPC amounts are exhausted and no additional monies are available from the failed brokerage firm’s estate.

Regulatory level security – P&A is a Registered Investment Advisor (RIA). Since our client assets are well over $100 million (actually near $1 billion), we are regulated at the federal level by the Securities & Exchange Commission (SEC). Stockbrokers and fee-based advisors (those who earn commissions plus management fees) are regulated by the Financial Industry Regulatory Authority (FINRA). The differences between the SEC and FINRA are many, but the main distinction is that FINRA is a self-regulatory body…the proverbial fox guarding the henhouse. The SEC on the other hand is an agency of the United States government tasked with protecting the interests of investors.

The Investment Advisers Act of 1940 defines what constitutes investment advice and places several mandates on an investment advisor. One is to annually update our ADV, which is our official brochure that spells out who we are, what we do, and how we charge for our services. This is available on our website ( under the Resources tab of the main menu. The Investment Advisers Act also requires us to always act in our clients’ best interests. This is known as the fiduciary standard of care, a term you’ve no doubt run across in our literature before.


Enhanced security will rob us of familiar procedures, simplification, and time. However, failure to pay attention to these issues may cost you money, and we don’t want it to cost you money on our watch. We’ll continue to attack these issues with systems and human beings….people you can talk to. We will help you adapt to the 21st century and educate you on processes if necessary. In the future we will all have to deal with dynamic passwords and imbedded chip credit/debit cards. Cadres of hackers live in China, Croatia, and Columbia. These are not your next door neighbors and they will not have to set foot on your property in order to steal. The future is not going to be a simple place; let’s prepare for the challenge.

About our 1-800 number…

Our original telephone carrier was Alltel. They sold out to Windstream and we stayed the course. Earlier this year we switched to Nebraska Telecom. As you know we have recently upgraded our portfolio management software to Tamarac. As a result we will need more bandwidth. Nebraska Telecom can’t fill those needs, so we are headed back to Windstream. During the course of these transactions our 1-800 number was unplugged. Windstream tells us that although it was unplugged overnight, it will take 2-4 weeks to plug back in (go figure). During that time we will be without an 800-number….however, it will return.

An 800 number is actually a dialer activated collect call. In the grand scheme of things, the cost is minimal and we are happy to provide the service. As a workaround, we suggest you program your cell phone with our local number 402-328-8800. A dialer using our 800 number on a cell phone is converting free long distance service into a toll call, so this would be a practical change anyway. We will post you in our monthly email blast when the 800 number is functioning again. In the meantime, we apologize for any inconvenience.


Tamarac prices securities based on trade date while Advent used settlement date. This affects the day we use to calculate your fees at the end of each quarter. In addition to being a negligible event, this change is acceptable to the SEC as long as we are consistent before and after the change. We promise to be consistent.

Speaking of Tamarac, you should have or will soon be receiving an email from Kristin in our office introducing you to your client portal. Then a few days later you will receive an email with the subject line “New Client Portal” which you will use to activate your portal. So what is it? This portal is essentially a secure website where you login to see a quick snapshot of your account, your account’s performance, realized gains and losses, as well as your current asset allocation. This portal will also be where we deliver your quarterly statements electronically, beginning with next quarter’s statement. We think this is worthy of your attention and a valuable resource for those who like to follow their accounts online. This won’t mean reduced contact from us.


As Always,

James S. Pittenger, Jr,

Dan Anderson

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