Castle Rock Investment Company

Independent Guide, Trusted Partner.

Blog

Coming April 10, 2017

by

Did you know that when you pay for investment advice, your adviser might not always have your best interests at heart? Yes, investment advisers are currently legally allowed to sell you products with their own financial gains in mind, even if it means that the products have a high price tag or pay excessive commissions. This is ridiculous, we know, but there is good news for investors on the horizon!

On April 8, 2016, the DOL released its final “Conflict of Interest Rule” to update the definition of fiduciary investment advice under the Employee Retirement Income Security Act (ERISA). The new rule will protect investors by requiring all who provide retirement investment advice to plans and IRAs to abide by a ‘fiduciary’ standard, which basically means that they must put their clients’ best interests ahead of their own financial gains.

What does this new regulation mean for average investors? It is a big win for them. Castle Rock Investment Company applauds the new regulation since it empowers investors to be given the best advice possible as they make crucial decisions about their retirement savings plans. If you have questions about the new fiduciary regulation, please contact us at info@castlerockinvesting.com or via phone at 303.719.7523.

Castle Rock Investment Company Celebrates 10 Years!

by

image005

Castle Rock Investment Company, formed in April 2006, is an independent woman-owned registered investment adviser located in Castle Rock, Colorado. We celebrated our 10-year anniversary on April 17, 2016.

To celebrate this important milestone, 50 people attended our 10 Year Anniversary Party at Siena at the Courtyard in Castle Rock.  It was a wonderful evening with delicious food, great weather and a festive atmosphere. We were honored that so many of our colleagues and friends came to the event to celebrate our anniversary.

Thank you to everyone who has supported our company over the past 10 years. We look forward to continue serving our great clients for many years to come.

Regards,

Michele Suriano
President
Castle Rock Investment Company

 

cric3

 

 

Water Cooler Wisdom: First Quarter 2016

by

The date has been set: April 10, 2017

In one year’s time, an adviser to retirement investors will be required by law to put the interests of their clients first.

While this sounds absurd to the average American, unfortunately it’s true that advisers have been allowed to put their financial interests ahead of their clients. After years of hard work, the DOL has finally issued new regulations that require a duty of loyalty from your adviser.

Let’s take a walk down memory lane for a moment. Seven years ago…

Unemployment was 10%
Home prices had dropped 30%
The S&P 500 Index had fallen 57%

Today, we are talking about the new money market fund regulation. Why? Well, money markets are losing their implied guarantee of safety on October 16, 2016. Remember, when the Reserve Primary Fund, the oldest money fund, broke the buck on 9/16/08 after Lehman filed bankruptcy? Our government immediately set up an insurance program that guaranteed a $1 NAV for any covered fund to avert a run on money market funds.

Remember TARP? No? Right…it’s not the canvas you throw on your car. It was the $475 billion investment signed by President Bush on 10/3/08 for purchasing assets and equity from financial institutions to stabilize the financial sector. That was following the blank check written in July 2008 to shore up Fannie Mae and Freddie Mac and launch a foreclosure relief program. So far $187 billion has been committed to those programs.

The following Spring we witnessed the auto industry bailout and their suppliers. See a list of those companies that failed to repay their bailout money at https://projects.propublica.org/bailout/list/losses. $12.6 billion of the $17.3 billion that the taxpayers lost were due to GM and Chrysler.

Then the rule we love to hate the most…the Dodd-Frank bill, which was signed July 21, 2010, was designed to end “too-big-to-fail” taxpayer bailouts and to protect consumers from abusive financial services practices. However, the problems persist. Five of the largest banks submitted living wills in 2015 that are not credible. One of the four systemically important nonbank financial institutions just won a court order to lift its designation. The SEC, even after recommending a uniform fiduciary standard of conduct for broker-dealers on January 22, 2011, still hasn’t promulgated any rules to that effect. In today’s market, retail investors still don’t have any protection against advisers that put their own financial interests first.

It took us six years to get this far so it is not the time to let down our guard. Everyone hates new rules but shall we test the fate of our future and learn nothing from our past?

Click Here to view a few “dismal” charts on domestic equity performance, labor force participation, and government bond yields. Let’s talk.

 

Water Cooler Wisdom: Fourth Quarter 2015

by

“What, if anything, can the rest of the world do to mitigate the volatile China impact?” – Anonymous client

Great question…and unfortunately, I don’t know the answer. Free trade is a basic American principle than underpins our capitalist system (my editor removed “mostly capitalist”). Of course, we all know that free trade isn’t truly “free” and America still operates from an unfair position with China. This is not new in 2015 but what’s changed over time is how quickly information is disseminated to “investors,” (human or not) and the speed at which our intermediaries can transfer funds.

Watching China move from a manufacturing to a service economy is like watching an awkward teen move into adulthood. You can’t hasten the pace, or make them mature overnight, since some things just take time. China implemented market circuit breakers on the first day of trading in 2016 that were tested that same day. Trading was suspended for 15 minutes when the market (CSI300 Index) dropped 5% and halted the rest of the day after the market dropped 7%. The circuit breaker was deactivated later that week after halting trading twice and exacerbating the market sell-offs it was designed to limit.

Back at home, the U.S. economic numbers generally look sound but there’s nothing to get excited about. We are missing that one glaring opportunity to spur inflation and, in turn, wage growth. Long-term GDP growth of 1.5% is a yawner, labor force participation is down to 62.5%, and we know the graduating class of 2015 is the most indebted class ever.  In other words, they’ve already consumed a larger part of their future income than previous graduates. Talk about a drag…on the economy.

It is ironic but a drop in the value of the U.S. dollar, an increase in interest rates, and a drop in the supply of oil actually sounds good right now (see “Oil Markets”). It makes me long for the days of 13% interest rates and long lines at the gas pump when you could only fill up on odd or even days (depending on the last number on your license plate).

But then again…stagflation is depressing. I’d take today’s economy over the 1970’s any day. Economists disagree on whether there will be three or four Federal Reserve rate hikes in 2016 (see “The Fed and Interest Rates”) and in spite of a 0% return in money markets, we have almost $12 Trillion in cash (notice the capital “T,” see “Cash Accounts”).

Conclusion
As usual, we recommend a balanced portfolio with a risk profile suitable for each investor’s tolerance and goals. 2015 seemed to play out the new normal of volatility, but we should continue to invest wisely, steadily and with discipline. Volatility is here to stay.

Water Cooler Wisdom: Third Quarter 2015

by

During last quarter’s review meeting, I promised a snarky review this quarter, but “good grief” as Charlie Brown would say. The “Grexit” story from July feels insignificant at this point. Greece is now negotiating the “transfer” of over 50,000 migrants and refugees. In fact, the International Organization for Migration reported that more than 35,000 migrants and refugees arrived in Greece during the first week of October alone for a total of almost 435,000 since January.

Perspective: It’s hard to get upset about a reduction in your pension check when you are surrounded by refugees who were forced to flee their homes by armed conflict. A tough year is all relative.

The vast majority of Syrian refugees have fled to neighboring countries, including Turkey (about 1.9 million), Lebanon (about 1.1 million), and Jordan (about 630 thousand). The impact of the global migrant crisis and the response by government leaders is a bigger issue than can be addressed here. Germany is expecting more than 800,000 people to claim asylum this year, which may provide a little relief with their aging demographic issues. Perhaps a silver lining?

But let’s move on to the stories that impacted the bottom line.

China Slowdown

At the beginning of August, we became aware of the ongoing slowdown in China when July’s Purchasing Managers’ Index (“PMI”) fell to 47.8. Just eight days later, the Chinese government unexpectedly devalued the Yuan by 2.0%, surprising markets and sending stock prices tumbling around the world and making us all believers that something was awry in China. When the August PMI came in at 47.3, it reinforced concerns of a global slowdown. That weighed even further on global commodities and markets prompting the Fed to leave rates unchanged yet again. It appears that China is struggling to transition from an investment-driven economy to a consumer one and they may have mistakenly used one of their tools as a sledgehammer.

Commodities

Remember the days when it seemed as if China was going to either consume or contractually gobble up most of the world’s natural resources? It reminded me of when my father would complain over dinner about the Japanese buying up Manhattan real estate in the 1980s. The purchase of Rockefeller Center really lit him up. In the slides that follow, you’ll see China’s immense consumption of industrial metals in 2014, a dramatic drop in its GDP contribution from investment in 2015, and the current level of commodity prices.

Conclusion

As usual, we recommend a balanced portfolio with a risk profile suitable for each investor’s tolerance. Participants will not be pleased when they receive their third quarter statements but, hopefully, we have all learned to invest wisely, steadily and with discipline. Good grief.

Full Report with Slides

Water Cooler Wisdom: Second Quarter 2015

by

It is challenging to write an economic update with the “Grexit” story changing each hour, Chinese stocks in a free fall, and technical glitches at United, NYSE, etc. seeming particularly suspicious. The Freedom of Information Act, along with our competitive news media market, provide some comfort, but there is no way of knowing what the Eurozone or markets are going to look like at the time you read this.

Returns and Valuations by Style
What happened in the markets in the second quarter? Not much. More importantly, let’s look at the Forward Price to Earnings ratio on the right hand side of the chart. We are in the seventh year of a bull market and P/E ratios are slightly above their twenty-year average for domestic value stocks while growth, or “momentum stocks” are still undervalued. Ironic? Perhaps we are still a little nervous after experiencing a loss of approximately half our investable assets twice within the last fifteen years.

Sources of S&P 500 Earnings
No matter what happens in Greece, economists are projecting a $4 loss in earnings per share for each quarter for the S&P 500 Index from a strong dollar and low oil prices. Long term, the strong dollar, up 17.8% year-over-year, is projected to decrease GDP over 1% with an offsetting benefit from lower oil prices. Going back to earnings, we know that valuations matter and they have a strong correlation to five-year returns. If earnings don’t increase as expected, the market doesn’t have much room to grow.

Long-term drivers of economic growth
As we’ve discussed before, the U.S. has a demographic disadvantage to emerging economies. Growth in real GDP is dependent on growth in the working age population and an increase in productivity. According to the Census Bureau, the forecast for the increase in civilian working age population is a dismal 0.4% growth over the next ten years as the Baby Boomers move into retirement. Investment in nonresidential fixed assets has been recovering from the global financial crisis but the long-term GDP forecast is hovering around 1.5%.

Conclusion
As usual, we recommend a balanced portfolio with a risk profile suitable for each investor’s tolerance. The current headlines may be a case of the tail wagging the dog. Global growth still has a solid foundation and the U.S. is expected to reach full employment in 2016. Slow but steady growth is on the horizon.

Supreme Court to Fiduciaries: You Must Monitor Your Plans’ Investments!

by

Screen Shot 2015-06-10 at 10.13.07 PMCastle Rock Investment Company wanted to update you on a recent significant Supreme Court case. Last month, the United States Supreme Court issued a unanimous decision (9-0) in Tibble v. Edison International, ruling that plan sponsors are not only responsible for reviewing retirement plan investments but that they also have a “continuing duty to monitor trust investments and remove imprudent ones.” This decision was in favor of a 401(k) plan participant and overturned a previous ruling of the 9th Circuit of Appeals that was in favor of Edison International.

The ruling declared that the company’s fiduciaries did not uphold their responsibility to monitor three higher-cost retail mutual funds, when “materially equivalent and cheaper institutional shares existed.” Basically, the plan kept higher-cost retail class funds when lower-cost wholesale class versions of those funds were available. This resulted in the participants unnecessarily paying higher fees.

To sum up the case, Justice Stephen Breyer wrote, “ERISA’s fiduciary duty is derived from the common law of trusts, which provides that a trustee has a continuing duty–separate and apart from the duty to exercise prudence in selecting investments at the outset—to monitor, and remove imprudent, trust investments.”

This case has huge implications for plan sponsors, plan fiduciaries, and the entire industry. It could open the door for more claims that fiduciaries failed to properly monitor plan investments. However, the Court did not go into detail on what fiduciaries’ monitoring duties actually entail, so future implications remain somewhat uncertain. What can be gleaned from it is that fiduciaries have the responsibility to periodically monitor their plans’ investments.

If you have any questions or comments on the implications of this case, please feel free to contact Castle Rock Investment Company at 303-725-7086.