PAYROLL TAX CUT EXTENDED TWO MONTHS
Paychecks won’t shrink; long-term jobless benefits will continue.
A last-minute gift to 160 million Americans. On December 23, Congress approved a 2-month extension of the payroll tax holiday that President Obama quickly signed into law. So we will not see shrunken paychecks come January. The new law also extends long-term unemployment benefits through February 29 and authorizes a 2-month reprieve on pay cuts to doctors by Medicare.1
• Prior to 2011, wage-earners were paying 6.2% in Social Security taxes. If Congress agrees to lengthen the payroll tax holiday across 2012, workers will merely pay 4.2% on the first $110,100 of wages next year.
• The latest extension in jobless benefits means that about 1.8 million Americans out of the workforce will keep getting unemployment checks averaging about $296 per week.
• Medicare payments to physicians will not diminish by 27% come January.1
The stopgap measure is both a relief and a prelude to much more debate. In total, the new legislation is projected to cost the federal government about $33 billion.1
Who will pay for these extensions? The direct answer: Fannie Mae and Freddie Mac. The indirect answer: American homeowners and homebuyers.
Title IV of the new law (“Mortgage Fees and Premiums”) notes that Fannie and Freddie will be boosting guarantee fees on new loans next year. If the payroll tax holiday is approved for all of 2012, anyone who buys or refinances next year will end up giving back about 20% of the approximately $1,000 tax break.2
Instead of collecting from borrowers directly with a fee hike, the twin GSEs will increase fees for banks and other lending institutions starting in January. The Congressional Budget Office projects that this will raise $35.7 billion across 2012-2021, with the revenue going to the Treasury rather than to Fannie and Freddie.2
Comparatively speaking, this means that mortgage costs will be about $17 a month higher for someone purchasing a $200,000 home next year.2
What about that pipeline? Yes, the proposed 1,700-mile Keystone oil pipeline that would run from Alberta to the Gulf of Mexico. House Republicans had wanted it as a sweetener to the bill, contending that it would create tens of thousands of jobs.
The newly passed legislation requires President Obama to either approve or kill the controversial project by March 1. The State Department says it can’t manage a required environmental review by March 1 and therefore won’t be able to recommend the project; citing White House sources, the New York Times says the President will abide by the State Department’s guidance. However, that doesn’t prohibit TransCanada (the company behind the pipeline) or any other energy company from introducing a similar idea.3
The new agreement is effectively a postponement. When Congress returns to Capitol Hill next month, the debate over the yearlong extension of the payroll tax reduction should intensify. There will be three points of contention:
• How to pay for the full-year extension. Democrats wanted a new tax on millionaires, while House Republicans preferred a federal pay freeze. The projected cost of the yearlong payroll tax cut is $112 billion.
• Rethinking long-term jobless benefits. House Republicans have talked about ending benefits at 59 weeks, something Democrats do not favor.
• Consideration for the health of the Social Security trust fund. If Americans do end up paying 2% less in Social Security taxes for all of 2012, how does the trust fund make up the slack? Some legislators want the Treasury to take care of the shortfall; others worry that the payroll tax will be permanently set at the current level and open the door to reduced Social Security benefits in the future.4,5
Payroll taxes are reduced through February; in terms of the drama surrounding his issue, it’s only an intermission.
Citations.
1 - money.cnn.com/2011/12/23/news/economy/payroll_tax_cut_deal/ [12/23/11]
2 - blogs.ajc.com/jamie-dupree-washington-insider/2011/12/18/paying-for-the-payroll-tax-cut-extension/ [12/18/11]
3 - www.nytimes.com/2011/12/24/us/provision-may-halt-keystone-pipeline-but-oil-is-still-likely-to-flow.html [12/23/11]
4 - www.kansascity.com/2011/12/23/3335510/congress-approves-payroll-tax.html [12/23/11]
5 - montoyaregistry.com/Financial-Market.aspx?financial-market=tax-loss-harvesting&category=31 [12/23/11]
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.
Thursday, December 22, 2011
WRANGLING OVER THE PHANTOM STIMULUS
The headlines are screaming again, this time about the Capitol Hill controversy over payroll tax cuts. And, as usual, there is more to the story than what you're reading.
First the good news. Earlier reports said that a stalemate on the tax cut would shut down the government, but before the Senate went home for the holidays, it passed a separate bill that finances the government through next September.
Better news: by all reports, Republicans and Democrats were--and are--in general agreement that there should be some kind of stimulus to the still-recovering economy, and the biggest, least-stimulated sector is consumer spending. The Republicans argued for more tax relief for the wealthiest Americans, and want to reduce pollution controls and force the President to approve the proposed Keystone XL pipeline, which would deliver oil from tar sands in Alberta, Canada to refineries in Texas. Meanwhile, the Democrats wanted a broad-based stimulus measure that would put spending money in the hands of more mainstream American consumers. And they supported environmentalist opposition to the pipeline and the pollution proposals.
Naturally, the two sides couldn't agree on a compromise, so the Senate, by an overwhelming majority, kicked the can down the road for two months by agreeing to continue the reduction in Social Security taxes from 6.2% to 4.2% until Congress could get back in session early next year.
It seems clear that the Senators expected their colleagues in the House of Representatives to follow this simple solution. But nothing is simple in this partisan political atmosphere, and the House (for now, at least) has rejected the measure.
There are several interesting complexities here that should have gotten more attention. One of them is the problems that this wrangling has created for employers, who will have to scramble at the last minute to change their payroll systems to reflect either the 6.2% rate or the 4.2% rate. Which will it be? Who knows? All anybody knows for sure is that the withholding amount will need to be correct starting January 1, and the National Payroll Reporting Consortium has already said that, as a result of the brinkmanship, there is now not enough notice to accommodate any changes that quickly.
Of course, if and when the whole issue is taken up at the end of the proposed two-month extension, companies would face exactly the same dilemma. Chalk this up to a Congress that is oblivious to the consequences of its actions on the business community--especially small businesses.
Behind the scenes, there are other dramas. One involves the very complicated way that the Social Security tax reduction is structured. Reducing the payroll tax would obviously reduce the flow of money into the Social Security trust fund, which is famously experiencing solvency troubles of its own. Neither side wanted to be seen as making the entitlement mess any worse, so the stopgap bill would have had the U.S. Treasury pick up the payments--a sideways accounting move has no real substance. The bill also prevents doctors who accept Medicare payments from receiving a 27% reduction in reimbursement payments, which would weaken the financial stability of another entitlement program, so the Treasury will pay that out of its pocket as well.
But the surprising thing here is that this is actually a revenue-neutral piece of legislation. The Treasury coffers would be replenished through a side door that nobody seems to have noticed. Title IV, entitled "Mortgage Fees and Premiums," would have raised the amount that Fannie Mae and Freddie Mac--the organizations that back a majority of home loans in the U.S.--would collect in mortgage fees after January 2012. In all, the raised mortgage fees--which would increase the cost of home ownership at a time when the housing market is staggering--would pay for the two month extension of the payroll tax cut (estimated at $20 billion) plus two months of additional jobless benefits for 2.5 million out-of-work Americans (an estimated $8.4 billion) and two months of added Medicare reimbursements to doctors (an estimated $6.6 billion).
Can we call this a stimulus, when money comes out of the pockets of home buyers and put in the pockets of payroll workers, the unemployed and doctors? Since the bill seems to be stuck in partisan wrangling, maybe the question is moot anyway.
Sources:
Payroll tax issues, and Treasury funding of Social Security:
http://www.nytimes.com/2011/12/20/us/politics/house-set-to-vote-down-payroll-tax-cut-extension.html?pagewanted=all
Fannie and Freddie: http://blogs.ajc.com/jamie-dupree-washington-insider/2011/12/18/paying-for-the-payroll-tax-cut-extension/
Pipeline and pollution aspects of the legislation: http://www.msnbc.msn.com/id/45707185/ns/politics/t/senate-oks-payroll-tax-cut-extension-house-gop-irked/
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
First the good news. Earlier reports said that a stalemate on the tax cut would shut down the government, but before the Senate went home for the holidays, it passed a separate bill that finances the government through next September.
Better news: by all reports, Republicans and Democrats were--and are--in general agreement that there should be some kind of stimulus to the still-recovering economy, and the biggest, least-stimulated sector is consumer spending. The Republicans argued for more tax relief for the wealthiest Americans, and want to reduce pollution controls and force the President to approve the proposed Keystone XL pipeline, which would deliver oil from tar sands in Alberta, Canada to refineries in Texas. Meanwhile, the Democrats wanted a broad-based stimulus measure that would put spending money in the hands of more mainstream American consumers. And they supported environmentalist opposition to the pipeline and the pollution proposals.
Naturally, the two sides couldn't agree on a compromise, so the Senate, by an overwhelming majority, kicked the can down the road for two months by agreeing to continue the reduction in Social Security taxes from 6.2% to 4.2% until Congress could get back in session early next year.
It seems clear that the Senators expected their colleagues in the House of Representatives to follow this simple solution. But nothing is simple in this partisan political atmosphere, and the House (for now, at least) has rejected the measure.
There are several interesting complexities here that should have gotten more attention. One of them is the problems that this wrangling has created for employers, who will have to scramble at the last minute to change their payroll systems to reflect either the 6.2% rate or the 4.2% rate. Which will it be? Who knows? All anybody knows for sure is that the withholding amount will need to be correct starting January 1, and the National Payroll Reporting Consortium has already said that, as a result of the brinkmanship, there is now not enough notice to accommodate any changes that quickly.
Of course, if and when the whole issue is taken up at the end of the proposed two-month extension, companies would face exactly the same dilemma. Chalk this up to a Congress that is oblivious to the consequences of its actions on the business community--especially small businesses.
Behind the scenes, there are other dramas. One involves the very complicated way that the Social Security tax reduction is structured. Reducing the payroll tax would obviously reduce the flow of money into the Social Security trust fund, which is famously experiencing solvency troubles of its own. Neither side wanted to be seen as making the entitlement mess any worse, so the stopgap bill would have had the U.S. Treasury pick up the payments--a sideways accounting move has no real substance. The bill also prevents doctors who accept Medicare payments from receiving a 27% reduction in reimbursement payments, which would weaken the financial stability of another entitlement program, so the Treasury will pay that out of its pocket as well.
But the surprising thing here is that this is actually a revenue-neutral piece of legislation. The Treasury coffers would be replenished through a side door that nobody seems to have noticed. Title IV, entitled "Mortgage Fees and Premiums," would have raised the amount that Fannie Mae and Freddie Mac--the organizations that back a majority of home loans in the U.S.--would collect in mortgage fees after January 2012. In all, the raised mortgage fees--which would increase the cost of home ownership at a time when the housing market is staggering--would pay for the two month extension of the payroll tax cut (estimated at $20 billion) plus two months of additional jobless benefits for 2.5 million out-of-work Americans (an estimated $8.4 billion) and two months of added Medicare reimbursements to doctors (an estimated $6.6 billion).
Can we call this a stimulus, when money comes out of the pockets of home buyers and put in the pockets of payroll workers, the unemployed and doctors? Since the bill seems to be stuck in partisan wrangling, maybe the question is moot anyway.
Sources:
Payroll tax issues, and Treasury funding of Social Security:
http://www.nytimes.com/2011/12/20/us/politics/house-set-to-vote-down-payroll-tax-cut-extension.html?pagewanted=all
Fannie and Freddie: http://blogs.ajc.com/jamie-dupree-washington-insider/2011/12/18/paying-for-the-payroll-tax-cut-extension/
Pipeline and pollution aspects of the legislation: http://www.msnbc.msn.com/id/45707185/ns/politics/t/senate-oks-payroll-tax-cut-extension-house-gop-irked/
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
Tuesday, December 20, 2011
BUDGETING FOR RETIREMENT
It only makes sense – yet many retirees live without one.
You won’t be able to withdraw an unlimited amount of money in retirement. So a retirement budget is a necessity. Some retirees forego one, only to regret it later.
Run the numbers before you retire. Often people need about 70-80% of their end salaries in retirement, but this can vary. So years before you leave work, sit down for an hour or so (perhaps with the financial professional you know and trust) and take a look at your probable monthly expenses. Online calculators can help.1
The closer you get to your retirement date, the more exact you will need to be about your income needs. You first want to look for changing expenses: housing costs that might decrease or increase, health care costs, certain taxes, travel expenses and so on. Next, look at your probable income sources: Social Security (the longer you wait, the more income you can potentially receive), your assorted IRAs and 401(k)s, your portfolio, possibly a reverse mortgage or even a pension or buyout package.
While selling your home might leave you with more money for retirement, there are less dramatic ways to increase your retirement funds. You could realize a little more money through tax savings and tax-efficient withdrawals from retirement savings accounts, through reducing your investment fees, and getting your phone, internet and TV services from one provider.
If you have just retired or are about to, you will enter 2012 with some financial breaks. Social Security benefits will increase by 3.6% next year, Medicare Part B premiums will only rise $3.50 instead of the $10 that Medicare projected, and the Part B deductible will be $22 cheaper in 2012 ($140).2
Budget-wreckers to avoid. There are a few factors that can cause you to stray from a retirement budget. You can’t do much about some of them (sudden health crises, for example), but you can try to mitigate others.
• Supporting your kids, grandkids or relatives with gifts or loans.
• Withdrawing more than your portfolio can easily return.
• Dragging big debts into retirement that will nibble at your savings.
Budget well & live wisely. These are times of low interest rates and modest Wall Street gains. Given those factors, creating a retirement budget makes a lot of sense. A budget – and the discipline to stick with it – may make a financial difference.
Citations.
1 - www.smartmoney.com/retirement/planning/how-to-set-a-retirement-budget-1304908718392/ [5/12/11]
2 - online.wsj.com/article/SB10001424052970203716204577015673565194532.html [11/6/11]
Sincerely,
William T. Morrissey, CFP®
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commerical St., Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA
You won’t be able to withdraw an unlimited amount of money in retirement. So a retirement budget is a necessity. Some retirees forego one, only to regret it later.
Run the numbers before you retire. Often people need about 70-80% of their end salaries in retirement, but this can vary. So years before you leave work, sit down for an hour or so (perhaps with the financial professional you know and trust) and take a look at your probable monthly expenses. Online calculators can help.1
The closer you get to your retirement date, the more exact you will need to be about your income needs. You first want to look for changing expenses: housing costs that might decrease or increase, health care costs, certain taxes, travel expenses and so on. Next, look at your probable income sources: Social Security (the longer you wait, the more income you can potentially receive), your assorted IRAs and 401(k)s, your portfolio, possibly a reverse mortgage or even a pension or buyout package.
While selling your home might leave you with more money for retirement, there are less dramatic ways to increase your retirement funds. You could realize a little more money through tax savings and tax-efficient withdrawals from retirement savings accounts, through reducing your investment fees, and getting your phone, internet and TV services from one provider.
If you have just retired or are about to, you will enter 2012 with some financial breaks. Social Security benefits will increase by 3.6% next year, Medicare Part B premiums will only rise $3.50 instead of the $10 that Medicare projected, and the Part B deductible will be $22 cheaper in 2012 ($140).2
Budget-wreckers to avoid. There are a few factors that can cause you to stray from a retirement budget. You can’t do much about some of them (sudden health crises, for example), but you can try to mitigate others.
• Supporting your kids, grandkids or relatives with gifts or loans.
• Withdrawing more than your portfolio can easily return.
• Dragging big debts into retirement that will nibble at your savings.
Budget well & live wisely. These are times of low interest rates and modest Wall Street gains. Given those factors, creating a retirement budget makes a lot of sense. A budget – and the discipline to stick with it – may make a financial difference.
Citations.
1 - www.smartmoney.com/retirement/planning/how-to-set-a-retirement-budget-1304908718392/ [5/12/11]
2 - online.wsj.com/article/SB10001424052970203716204577015673565194532.html [11/6/11]
Sincerely,
William T. Morrissey, CFP®
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commerical St., Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA
Tuesday, December 13, 2011
TIMING OUT OF GAINS
Let's say you're looking at a stock market that has lost 81% over the past 2.7 years during a time of severe economic contraction. The headlines are not encouraging: the country is mired in depression, and so, too, is the rest of the world. Are you feeling bullish, or is this a great time to unload your stocks and stop the bleeding?
If you decided to unload, then you would have missed at least some of the dramatic market increases that started in 1937--4.7 years of annualized 32.1% gains, for a total gain of 266%.
Okay, suppose the market has dropped a total of 63% over a torturous 13.6 year period, and Business Week magazine has just proclaimed "The Death of Equities." Buy? Sell?
Again, the correct answer would have been "buy." After 1982, the S&P 500 gained a remarkable 666% over the next 18 years.
The accompanying chart (click on link below), created by Doug Short for the Advisor Perspective services, shows a number of market ups (blue) and downs (red) since 1871, and the thing you notice is that virtually every major market move, up or down, was unexpected. The bull markets came as a surprise, and the bear markets came at times when the markets seemed to be on a long-term roll. (The scale here is logarithmic, which means that if the chart were expressed in absolute terms, the long-term rise would look much steeper.)
In truth, the decision that faced most investors in 1921 (market down 69% over the previous 15 years) or 1949 (market down 54% over the previous 12 years) was not whether to make some kind of dramatic move into stocks. The decision, made daily as the newspaper carried discouraging news over and over again, was whether to stay invested in stocks and eventually reap the gains (396% and 413% respectively) that nobody could have predicted in advance.
The most important long-term statistic to come out of this analysis may be the dramatically different size of the gains and losses. Taken together, the various bulls since the market trough in 1877 brought investors gains of 2,075%--an average of a 415% gain per bull market. The bear markets, in aggregate, cost investors 329%--an average downturn of 65%.
Nobody knows when the markets are going to suddenly take off after a bearish period, and the longer and deeper and more discouraging the downturn gets, the less likely the next bull market seems. But history suggests that patient investors get more return during market upturns than they lose when the markets drop. Long-term, trying to outsmart the market and sidestep losses would have led to missing even bigger gains.
Source: http://www.advisorperspectives.com/dshort/updates/Secular-Bull-and-Bear-Markets.php
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
If you decided to unload, then you would have missed at least some of the dramatic market increases that started in 1937--4.7 years of annualized 32.1% gains, for a total gain of 266%.
Okay, suppose the market has dropped a total of 63% over a torturous 13.6 year period, and Business Week magazine has just proclaimed "The Death of Equities." Buy? Sell?
Again, the correct answer would have been "buy." After 1982, the S&P 500 gained a remarkable 666% over the next 18 years.
The accompanying chart (click on link below), created by Doug Short for the Advisor Perspective services, shows a number of market ups (blue) and downs (red) since 1871, and the thing you notice is that virtually every major market move, up or down, was unexpected. The bull markets came as a surprise, and the bear markets came at times when the markets seemed to be on a long-term roll. (The scale here is logarithmic, which means that if the chart were expressed in absolute terms, the long-term rise would look much steeper.)
In truth, the decision that faced most investors in 1921 (market down 69% over the previous 15 years) or 1949 (market down 54% over the previous 12 years) was not whether to make some kind of dramatic move into stocks. The decision, made daily as the newspaper carried discouraging news over and over again, was whether to stay invested in stocks and eventually reap the gains (396% and 413% respectively) that nobody could have predicted in advance.
The most important long-term statistic to come out of this analysis may be the dramatically different size of the gains and losses. Taken together, the various bulls since the market trough in 1877 brought investors gains of 2,075%--an average of a 415% gain per bull market. The bear markets, in aggregate, cost investors 329%--an average downturn of 65%.
Nobody knows when the markets are going to suddenly take off after a bearish period, and the longer and deeper and more discouraging the downturn gets, the less likely the next bull market seems. But history suggests that patient investors get more return during market upturns than they lose when the markets drop. Long-term, trying to outsmart the market and sidestep losses would have led to missing even bigger gains.
Source: http://www.advisorperspectives.com/dshort/updates/Secular-Bull-and-Bear-Markets.php
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
Monday, December 12, 2011
TWO DIRECTIONS
No doubt you've read about the European Union summit meeting in Brussels this past week, which was billed, in advance, as the negotiation that would finally deliver a final solution to Europe's debt crisis. You will probably not be surprised to hear that the outcome fell short of expectations.
In all, 23 of the 27 European nations agreed to follow the lead of France and Germany. They drafted a resolution to impose more central control over national budgets, and enforce future spending and budget discipline across the 17 countries that use the euro as their currency. The summit, in other words, focused on preventing the next debt crisis rather than finding ways to meet the current one head-on.
Even future discipline may be too much to expect. One of the holdouts to the resolution was a major player: Great Britain, whose stiff opposition to mandatory budget guidelines (and giving up control to an outside agency) means that the other governments will have to enforce their agreement as an "understanding" between governments rather than through the full authority of a treaty. (The other non-signatories--Sweden, the Czech Republic and Hungary--want to consult their legislative bodies before signing on for more austerity.)
In separate analyses, the Economist magazine and economist Cliff Wachtel tell us that there was no progress on addressing the immediate threat of default of Greek, Italian and Spanish bonds, which has become more pressing as their rates soar on the open market. On Thursday, Germany rejected proposals to strengthen the European Central Bank's bailout fund, and the ECB's central banker later announced that he had no plans to lower bond rates or buy government bonds outright.
The Wall Street Journal reported that currency traders were not impressed by this outcome. They boosted the euro's value a bit on Friday to essentially where it was last week. Credit analysts at Moody's and Standard & Poors were apparently even less impressed. Moody's issued downgrades on the solvency of three major French banks. S&P put several European nations on a downgrade watch; look for France to be the next major nation to suffer the indignity of a ratings drop.
Bond defaults are one worry in Europe; the other is recession. Economists at investment bank UBS announced, during the summit meeting, that they expect the 17-nation Eurozone's aggregate economic growth to fall into negative territory (-0.7%) next year. Without stimulus, with declining economic activity, European nations will have to make do with lower tax revenues, further calling into question their ability to pay the debt they already owe. The threat of default causes investors to demand ever-higher bond rates, raising borrowing costs and making default more likely.
Interestingly, you find the opposite dynamic in the U.S., where economic growth was a modest but positive 2% for the third quarter, fueled by gains in retail sales, manufacturing and housing. This is good news, an improvement over the 1.3% growth in the second quarter. The U.S. unemployment rate, which topped 10% in 2009, has quietly fallen back to 8.6%. But the U.S. Federal Reserve Board wants better news; on Tuesday, the Fed is expected to announce a strong commitment to keeping the federal funds rate near zero, and may soon undertake a third round of buying U.S. bonds as a way to encourage the housing and labor markets. Europe and the U.S. may be moving in opposite directions, in part because of opposite measures from their respective central banks.
Sources:
Wall Street Journal article: http://online.wsj.com/article/SB10001424052970203413304577088752248526164.html
The Economist: http://www.economist.com/blogs/charlemagne/2011/12/britain-and-eu-summit
Wachtel: http://seekingalpha.com/article/313050-prior-week-eu-summit-fails-yet-markets-rally-here-s-why
2% growth: http://www.bloomberg.com/news/2011-11-22/economy-in-u-s-expands-less-than-estimated-as-companies-cut-inventories.html
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
In all, 23 of the 27 European nations agreed to follow the lead of France and Germany. They drafted a resolution to impose more central control over national budgets, and enforce future spending and budget discipline across the 17 countries that use the euro as their currency. The summit, in other words, focused on preventing the next debt crisis rather than finding ways to meet the current one head-on.
Even future discipline may be too much to expect. One of the holdouts to the resolution was a major player: Great Britain, whose stiff opposition to mandatory budget guidelines (and giving up control to an outside agency) means that the other governments will have to enforce their agreement as an "understanding" between governments rather than through the full authority of a treaty. (The other non-signatories--Sweden, the Czech Republic and Hungary--want to consult their legislative bodies before signing on for more austerity.)
In separate analyses, the Economist magazine and economist Cliff Wachtel tell us that there was no progress on addressing the immediate threat of default of Greek, Italian and Spanish bonds, which has become more pressing as their rates soar on the open market. On Thursday, Germany rejected proposals to strengthen the European Central Bank's bailout fund, and the ECB's central banker later announced that he had no plans to lower bond rates or buy government bonds outright.
The Wall Street Journal reported that currency traders were not impressed by this outcome. They boosted the euro's value a bit on Friday to essentially where it was last week. Credit analysts at Moody's and Standard & Poors were apparently even less impressed. Moody's issued downgrades on the solvency of three major French banks. S&P put several European nations on a downgrade watch; look for France to be the next major nation to suffer the indignity of a ratings drop.
Bond defaults are one worry in Europe; the other is recession. Economists at investment bank UBS announced, during the summit meeting, that they expect the 17-nation Eurozone's aggregate economic growth to fall into negative territory (-0.7%) next year. Without stimulus, with declining economic activity, European nations will have to make do with lower tax revenues, further calling into question their ability to pay the debt they already owe. The threat of default causes investors to demand ever-higher bond rates, raising borrowing costs and making default more likely.
Interestingly, you find the opposite dynamic in the U.S., where economic growth was a modest but positive 2% for the third quarter, fueled by gains in retail sales, manufacturing and housing. This is good news, an improvement over the 1.3% growth in the second quarter. The U.S. unemployment rate, which topped 10% in 2009, has quietly fallen back to 8.6%. But the U.S. Federal Reserve Board wants better news; on Tuesday, the Fed is expected to announce a strong commitment to keeping the federal funds rate near zero, and may soon undertake a third round of buying U.S. bonds as a way to encourage the housing and labor markets. Europe and the U.S. may be moving in opposite directions, in part because of opposite measures from their respective central banks.
Sources:
Wall Street Journal article: http://online.wsj.com/article/SB10001424052970203413304577088752248526164.html
The Economist: http://www.economist.com/blogs/charlemagne/2011/12/britain-and-eu-summit
Wachtel: http://seekingalpha.com/article/313050-prior-week-eu-summit-fails-yet-markets-rally-here-s-why
2% growth: http://www.bloomberg.com/news/2011-11-22/economy-in-u-s-expands-less-than-estimated-as-companies-cut-inventories.html
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
Thursday, December 1, 2011
OCCUPY THE BIG PICTURE
If you look hard enough, you can find a lot of silliness in the Occupy Wall Street movement. This is unfortunate because, somewhere behind the tents and weird finger communications and alleged drug use, there's a real story to be told. And the story seems to be bigger than the media can get its arms around.
For example? Financial insiders and those of us in the financial planning profession have watched the brokerage industry fight furiously--and successfully--against having to register their brokers with the Securities and Exchange Commission as registered investment advisors. Why? Because that would require the registered brokers to give advice that puts the interests of their customers ahead of their own and also (quel horreur!) ahead of the companies that employ them.
Perhaps more to the point, those of us in the financial profession have to live with the fact that the major Wall Street firms are rarely held accountable for crimes and other actions that would be severely punished if you or I committed them.
Such as? Consider the recent settlement of an enforcement case that goes back to the 2008 market meltdown. The Wall Street Journal reported that U.S. District Court Judge Jed S. Rakoff is questioning how diligently the U.S. Securities and Exchange Commission enforced securities law when it investigated Citigroup (parent company of brokerage giant Smith Barney) regarding its sale of some of those infamous toxic mortgage-based debt instruments. Smith Barney brokers were selling the subprime mortgage instruments to their customers as highly-rated, safe bond instruments at the same time that the company's traders were betting heavily that the same packaged bonds would spiral down the toilet. In internal e-mails, one chortling trader described betting against the investments the company was selling, at a commission, to its customers as "The best short ever!!"
This once-in-a-lifetime short bet, combined with selling the dog investments in the first place, resulted in what the SEC estimated to be $160 million in fees and trading profits to Citigroup's bottom line.
The SEC's proposed fine, questioned by the judge: $95 million.
It gets worse. In the SEC's boilerplate language when it settles with major Wall Street firms, Citigroup and Smith Barney were allowed to neither admit nor deny the charges that they would be paying fines to settle. Judge Rakoff questioned whether there wasn't "an overriding public interest in determining whether the SEC's charges are true." Indeed.
Our regulators' very careful, very gentle admonishment of Wall Street's nastiest crimes has become such a routine part of our professional landscape that most of us in the financial services business have lost sight of how outrageous it really is. To put this in perspective, suppose you decided to go out and steal a neighbor's flat-screen TV set. If you were caught, would the justice system require you to pay back a portion of the cost of it, never have to admit guilt, and promise to watch yourself more carefully in the future?
Might people in all walks of life behave differently if they knew that the routine consequences of their crimes would be so lenient?
While the financial press is reporting on Wall Street crimes gone unpunished, the consumer press is groping to figure out how the rise of enormous, greedy financial gatekeepers is impacting the American economy as a whole. No doubt you've read accounts of how the large investment banks took hundreds of billions of dollars in taxpayer bailout money and then refused to lend money back into the American economy as it was teetering on the brink. But Time Magazine recently took a deeper look, in a cover article that concludes that America is no longer the world's leader in upward mobility--the land of opportunity--that it once was.
The magazine rightly calls America the "original meritocracy," where people were never supposed to be prisoners of the circumstances of their birth. Hard work defined the destiny of Americans. Those who were diligent were able to move out of poverty.
But then the magazine cites research by the Pew Charitable Trust's Economic Mobility Project, the Brookings Institute and the Organization for Economic Cooperation and Development, all of whom found that today it is harder for a person in America to move up out of his/her current economic status than it is in (I hope you're sitting down) Europe. Today, 42% of American men with fathers in the bottom fifth of the earning curve remain there--and you know that at least SOME of them were hard-workers. Only a quarter of comparable men in Denmark and Sweden, and only 30% of men in Great Britain do. France and Germany ranked higher on the opportunity scale than today's America. Sweden and Finland ranked much higher.
How did this happen? The magazine found that the financial sector in America now takes up about 8% of the American economy--a historic high--and this has been correlated with a stall in American entrepreneurship. Meanwhile, the people who run America's companies today earn more than 400 times as much as their lowest-paid worker, while the comparable number in Europe is around 40. Oddly, perhaps coincidentally, Europe's gap between CEO and lowest paid worker is almost exactly where it was in this country when America was still being called the Land of Opportunity.
To round out the Occupy Wall Street picture, some researchers are actually starting to question whether the economy needs the banking sector, and what for. In what may be the most accessible report on this wonkish debate, London School of Economics Professor Wouter den Haan notes that when the U.S. economy was emerging as the world's leader, in the decades after World War II, the large investment banks generated about 1.5% of the total profits in the economy. Today, that figure is around 15%--ten times as much.
When the profits were at 1.5%, bankers circulated money efficiently around the business landscape in the form of loans that were carefully researched. That, clearly, provided an enormous net value to society. But the professor wonders whether it is equally valuable when those firms began to extract "huge fees from the rest of the economy to construct opaque securities that were so complex that only a few understood how risky they were." If the prices had accurately reflected the true value of the products, he says, then those fees would have been negative, "since many such products were not beneficial to the buyer or to society as a whole."
The article doesn't consider the economic value that is created for society when a brokerage firm makes its profits betting against the toxic securities it created and sold to its customers.
Very little of these various issues are understood specifically by the people who are squabbling with police over whether they can pitch their tents in parks near the largest financial offices. The Occupy Wall Street crowd is acting on nothing more than a strong instinct that something is terribly wrong in America, and that the large banks are somehow at the center of the problem. The press can only seem to get its arms around little individual pieces of a very big picture.
But that picture, if we can see it clearly, is troubling. The American Dream is at stake. So, too, is the fairness of our legal system. What Wall Street fears more than anything else is a debate that asks whether much of what goes on in the largest investment banks--perhaps as much as 90% of it, based on current statistics--is doing our country and our economy more harm than good. Even more, it fears the idea that its hired representatives should have to give advice that primarily benefits their customers--which would immediately put an end to both the lucrative sales of creative new toxic securities and the revenue streams that would come from betting against them.
If we can start that debate in earnest, maybe the tents can come down. Or, at least, the people living in them could tell the reporters who cover them exactly what it is they're protesting.
Rakoff and the SEC: http://blogs.wsj.com/law/2011/10/28/sec-may-have-to-get-admissions/
http://www.cbsnews.com/8301-501369_162-20126566/ny-judge-challenges-$285m-citigroup-settlement/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CBSNewsTravelGuru+%28Travel+Guru%3A+CBSNews.com%29
Time magazine article: http://www.time.com/time/magazine/article/0,9171,2098586,00.html
Wouter den Haan blog: http://pragcap.com/why-do-we-need-a-financial-sector
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
For example? Financial insiders and those of us in the financial planning profession have watched the brokerage industry fight furiously--and successfully--against having to register their brokers with the Securities and Exchange Commission as registered investment advisors. Why? Because that would require the registered brokers to give advice that puts the interests of their customers ahead of their own and also (quel horreur!) ahead of the companies that employ them.
Perhaps more to the point, those of us in the financial profession have to live with the fact that the major Wall Street firms are rarely held accountable for crimes and other actions that would be severely punished if you or I committed them.
Such as? Consider the recent settlement of an enforcement case that goes back to the 2008 market meltdown. The Wall Street Journal reported that U.S. District Court Judge Jed S. Rakoff is questioning how diligently the U.S. Securities and Exchange Commission enforced securities law when it investigated Citigroup (parent company of brokerage giant Smith Barney) regarding its sale of some of those infamous toxic mortgage-based debt instruments. Smith Barney brokers were selling the subprime mortgage instruments to their customers as highly-rated, safe bond instruments at the same time that the company's traders were betting heavily that the same packaged bonds would spiral down the toilet. In internal e-mails, one chortling trader described betting against the investments the company was selling, at a commission, to its customers as "The best short ever!!"
This once-in-a-lifetime short bet, combined with selling the dog investments in the first place, resulted in what the SEC estimated to be $160 million in fees and trading profits to Citigroup's bottom line.
The SEC's proposed fine, questioned by the judge: $95 million.
It gets worse. In the SEC's boilerplate language when it settles with major Wall Street firms, Citigroup and Smith Barney were allowed to neither admit nor deny the charges that they would be paying fines to settle. Judge Rakoff questioned whether there wasn't "an overriding public interest in determining whether the SEC's charges are true." Indeed.
Our regulators' very careful, very gentle admonishment of Wall Street's nastiest crimes has become such a routine part of our professional landscape that most of us in the financial services business have lost sight of how outrageous it really is. To put this in perspective, suppose you decided to go out and steal a neighbor's flat-screen TV set. If you were caught, would the justice system require you to pay back a portion of the cost of it, never have to admit guilt, and promise to watch yourself more carefully in the future?
Might people in all walks of life behave differently if they knew that the routine consequences of their crimes would be so lenient?
While the financial press is reporting on Wall Street crimes gone unpunished, the consumer press is groping to figure out how the rise of enormous, greedy financial gatekeepers is impacting the American economy as a whole. No doubt you've read accounts of how the large investment banks took hundreds of billions of dollars in taxpayer bailout money and then refused to lend money back into the American economy as it was teetering on the brink. But Time Magazine recently took a deeper look, in a cover article that concludes that America is no longer the world's leader in upward mobility--the land of opportunity--that it once was.
The magazine rightly calls America the "original meritocracy," where people were never supposed to be prisoners of the circumstances of their birth. Hard work defined the destiny of Americans. Those who were diligent were able to move out of poverty.
But then the magazine cites research by the Pew Charitable Trust's Economic Mobility Project, the Brookings Institute and the Organization for Economic Cooperation and Development, all of whom found that today it is harder for a person in America to move up out of his/her current economic status than it is in (I hope you're sitting down) Europe. Today, 42% of American men with fathers in the bottom fifth of the earning curve remain there--and you know that at least SOME of them were hard-workers. Only a quarter of comparable men in Denmark and Sweden, and only 30% of men in Great Britain do. France and Germany ranked higher on the opportunity scale than today's America. Sweden and Finland ranked much higher.
How did this happen? The magazine found that the financial sector in America now takes up about 8% of the American economy--a historic high--and this has been correlated with a stall in American entrepreneurship. Meanwhile, the people who run America's companies today earn more than 400 times as much as their lowest-paid worker, while the comparable number in Europe is around 40. Oddly, perhaps coincidentally, Europe's gap between CEO and lowest paid worker is almost exactly where it was in this country when America was still being called the Land of Opportunity.
To round out the Occupy Wall Street picture, some researchers are actually starting to question whether the economy needs the banking sector, and what for. In what may be the most accessible report on this wonkish debate, London School of Economics Professor Wouter den Haan notes that when the U.S. economy was emerging as the world's leader, in the decades after World War II, the large investment banks generated about 1.5% of the total profits in the economy. Today, that figure is around 15%--ten times as much.
When the profits were at 1.5%, bankers circulated money efficiently around the business landscape in the form of loans that were carefully researched. That, clearly, provided an enormous net value to society. But the professor wonders whether it is equally valuable when those firms began to extract "huge fees from the rest of the economy to construct opaque securities that were so complex that only a few understood how risky they were." If the prices had accurately reflected the true value of the products, he says, then those fees would have been negative, "since many such products were not beneficial to the buyer or to society as a whole."
The article doesn't consider the economic value that is created for society when a brokerage firm makes its profits betting against the toxic securities it created and sold to its customers.
Very little of these various issues are understood specifically by the people who are squabbling with police over whether they can pitch their tents in parks near the largest financial offices. The Occupy Wall Street crowd is acting on nothing more than a strong instinct that something is terribly wrong in America, and that the large banks are somehow at the center of the problem. The press can only seem to get its arms around little individual pieces of a very big picture.
But that picture, if we can see it clearly, is troubling. The American Dream is at stake. So, too, is the fairness of our legal system. What Wall Street fears more than anything else is a debate that asks whether much of what goes on in the largest investment banks--perhaps as much as 90% of it, based on current statistics--is doing our country and our economy more harm than good. Even more, it fears the idea that its hired representatives should have to give advice that primarily benefits their customers--which would immediately put an end to both the lucrative sales of creative new toxic securities and the revenue streams that would come from betting against them.
If we can start that debate in earnest, maybe the tents can come down. Or, at least, the people living in them could tell the reporters who cover them exactly what it is they're protesting.
Rakoff and the SEC: http://blogs.wsj.com/law/2011/10/28/sec-may-have-to-get-admissions/
http://www.cbsnews.com/8301-501369_162-20126566/ny-judge-challenges-$285m-citigroup-settlement/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CBSNewsTravelGuru+%28Travel+Guru%3A+CBSNews.com%29
Time magazine article: http://www.time.com/time/magazine/article/0,9171,2098586,00.html
Wouter den Haan blog: http://pragcap.com/why-do-we-need-a-financial-sector
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
Monday, November 28, 2011
THE SUPER COMMITTEE'S EPIC FAIL
What might this mean for the economy & the markets?
Congress punts on third down. Unable to reach consensus, the Congressional super committee of 12 offered America a disappointing result Monday. Panel co-chairs Rep. Jeb Hensarling (R-TX) and Sen. Patty Murray (D-WA) announced that "it will not be possible to make any bipartisan agreement available to the public before the committee's deadline" on November 23, throwing in the towel with two days to go.1
The big divide was over the Bush-era tax cuts. While Sen. John Kerry (D-MA) reminded the public and his fellow legislators that "we are not a tax-cutting committee, we're a deficit-reduction committee," there was stiff opposition to rolling back the EGTRRA and JGTRRA cuts of the 2000s. The super committee paired some strange bedfellows among Capitol Hill legislators, so this head-butting was not unexpected.2
What happens now? As the super committee failed to create a plan to trim $1.2 trillion or more from the federal deficit, that sets things up for an automatic $1.2 trillion in cuts effective over a 10-year stretch beginning January 2, 2013. According to the Budget Control Act passed in summer 2011, that $1.2 trillion will be slashed almost 50/50 from the defense budget and government services programs. Social Security and Medicaid payments, military pay and veteran's benefits will be exempt from cuts; current Medicare recipients will not be directly affected. This default deficit reduction could mean as much as a 9.3% cut to some federal programs, by the estimate of the left-leaning Center for Budget and Policy Priorities.3,4
This is what the super committee's apparent failure means politically. Economically, it could result in pain for American investors given the probable impact on our credit rating, stock market, tax laws and economic growth.
Is another downgrade ahead? Standard and Poor's cut the U.S. credit rating a notch to 'AA+' on July 14, and it warned that another cut to 'AA' was possible by mid-2013 without decisive federal action on the issue. After the super committee conceded defeat on November 21, S&P, Fitch's and Moody's stood pat regarding a possible downgrade.5,6
What might be in store for the market? In a November 21 note to investors, Goldman Sachs equity strategist David Kostin warned that the S&P 500 could potentially correct to 1100 as a result of this gaffe. Other analysts are less gloomy; some feel that the market may have priced this one in and will at least maintain some momentum barring a second downgrade (Monday's selloff certainly could have been worse).7
What does this mean tax-wise? The Bush-era tax cuts are set to expire at the end of 2012 as part of the involuntary deficit reduction now set to occur. There could be other possible tax consequences as a result of the super committee's failure. Unless Congress unexpectedly passes the President's American Jobs Act, the payroll tax holiday will go away in 2012 (worth about $935 to the average worker, which some legislators wanted to make permanent). RBC Capital Markets analysts warn that taking the payroll tax back to 6.2% could shave 1% of U.S. GDP next year. For businesses, the current "bonus" depreciation write-offs for new capital equipment and the R&E tax credit could also become casualties. Additionally, when you do a broad cut to federal programs, you are impacting payments from Washington to state programs; state taxes could rise to compensate for that lost money.4,8
How about Medicare, the SSA & jobless benefits? While Medicare recipients won't be bitten by the default deficit reduction, payments to Medicare providers could be shrunk by 2%. Long-term unemployment insurance would also dry up for 2.1 million Americans by February, according to the Department of Labor's forecast; JPMorgan Chase economists think that development alone might hurt U.S. GDP by 0.75%.4,8
The Social Security Administration is in line for budget cuts as a result of the super committee's indecision, along with Head Start and federal job training programs. A Congressional Budget Office analysis shows that the Pentagon would face the largest cut in 2013 (10%). Federal agriculture, environmental and education programs would face cuts of approximately 8% starting in that year.4,9
Could congress "undo" this? President Obama is emphatic that there will be no rewind on this one. While there could be a move in Congress to try and nullify or alter the automatic budget cuts, the President has said he will not support such a bill.
There had to be deficit reduction at some point, and the legislators of the super committee faced a Herculean task to come up with a plan that satisfied their many constituencies. However, it will be difficult to convince economists and investors that doing nothing is better than doing something; this unpalatable easy out may leave many in the lurch.
Citations
1 -www.cnbc.com/id/45391077 [11/21/11]
2 - www.foxnews.com/politics/2011/11/20/blame-game-erupts-as-hope-for-deficit-deal-fades/ [10/20/11]
3 - blogs.abcnews.com/politicalpunch/2011/07/debt-ceiling-framework-where-they-landed.html [7/31/11]
4 - www.usnews.com/news/articles/2011/11/21/so-the-super-committee-failed-how-will-that-affect-you [11/21/11]
5 - bloomberg.com/news/2011-08-06/u-s-credit-rating-cut-by-s-p-for-first-time-on-deficit-reduction-accord.html [8/5/11]
6 - blogs.wsj.com/marketbeat/2011/11/21/sp-super-failure-wont-affect-us-credit-rating/?mod=google_news_blog [11/21/11]
7 - www.cnbc.com/id/45355898 [11/21/11]
8 - www.csmonitor.com/Business/Latest-News-Wires/2011/11/21/Super-committee-fails [11/21/11]
9 - www.foxnews.com/politics/2011/11/21/clock-ticks-down-to-super-committee-failure/ [11/21/11]
Sincerely,
William T. Morrissey, CFP®
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commerical St., Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.
Congress punts on third down. Unable to reach consensus, the Congressional super committee of 12 offered America a disappointing result Monday. Panel co-chairs Rep. Jeb Hensarling (R-TX) and Sen. Patty Murray (D-WA) announced that "it will not be possible to make any bipartisan agreement available to the public before the committee's deadline" on November 23, throwing in the towel with two days to go.1
The big divide was over the Bush-era tax cuts. While Sen. John Kerry (D-MA) reminded the public and his fellow legislators that "we are not a tax-cutting committee, we're a deficit-reduction committee," there was stiff opposition to rolling back the EGTRRA and JGTRRA cuts of the 2000s. The super committee paired some strange bedfellows among Capitol Hill legislators, so this head-butting was not unexpected.2
What happens now? As the super committee failed to create a plan to trim $1.2 trillion or more from the federal deficit, that sets things up for an automatic $1.2 trillion in cuts effective over a 10-year stretch beginning January 2, 2013. According to the Budget Control Act passed in summer 2011, that $1.2 trillion will be slashed almost 50/50 from the defense budget and government services programs. Social Security and Medicaid payments, military pay and veteran's benefits will be exempt from cuts; current Medicare recipients will not be directly affected. This default deficit reduction could mean as much as a 9.3% cut to some federal programs, by the estimate of the left-leaning Center for Budget and Policy Priorities.3,4
This is what the super committee's apparent failure means politically. Economically, it could result in pain for American investors given the probable impact on our credit rating, stock market, tax laws and economic growth.
Is another downgrade ahead? Standard and Poor's cut the U.S. credit rating a notch to 'AA+' on July 14, and it warned that another cut to 'AA' was possible by mid-2013 without decisive federal action on the issue. After the super committee conceded defeat on November 21, S&P, Fitch's and Moody's stood pat regarding a possible downgrade.5,6
What might be in store for the market? In a November 21 note to investors, Goldman Sachs equity strategist David Kostin warned that the S&P 500 could potentially correct to 1100 as a result of this gaffe. Other analysts are less gloomy; some feel that the market may have priced this one in and will at least maintain some momentum barring a second downgrade (Monday's selloff certainly could have been worse).7
What does this mean tax-wise? The Bush-era tax cuts are set to expire at the end of 2012 as part of the involuntary deficit reduction now set to occur. There could be other possible tax consequences as a result of the super committee's failure. Unless Congress unexpectedly passes the President's American Jobs Act, the payroll tax holiday will go away in 2012 (worth about $935 to the average worker, which some legislators wanted to make permanent). RBC Capital Markets analysts warn that taking the payroll tax back to 6.2% could shave 1% of U.S. GDP next year. For businesses, the current "bonus" depreciation write-offs for new capital equipment and the R&E tax credit could also become casualties. Additionally, when you do a broad cut to federal programs, you are impacting payments from Washington to state programs; state taxes could rise to compensate for that lost money.4,8
How about Medicare, the SSA & jobless benefits? While Medicare recipients won't be bitten by the default deficit reduction, payments to Medicare providers could be shrunk by 2%. Long-term unemployment insurance would also dry up for 2.1 million Americans by February, according to the Department of Labor's forecast; JPMorgan Chase economists think that development alone might hurt U.S. GDP by 0.75%.4,8
The Social Security Administration is in line for budget cuts as a result of the super committee's indecision, along with Head Start and federal job training programs. A Congressional Budget Office analysis shows that the Pentagon would face the largest cut in 2013 (10%). Federal agriculture, environmental and education programs would face cuts of approximately 8% starting in that year.4,9
Could congress "undo" this? President Obama is emphatic that there will be no rewind on this one. While there could be a move in Congress to try and nullify or alter the automatic budget cuts, the President has said he will not support such a bill.
There had to be deficit reduction at some point, and the legislators of the super committee faced a Herculean task to come up with a plan that satisfied their many constituencies. However, it will be difficult to convince economists and investors that doing nothing is better than doing something; this unpalatable easy out may leave many in the lurch.
Citations
1 -www.cnbc.com/id/45391077 [11/21/11]
2 - www.foxnews.com/politics/2011/11/20/blame-game-erupts-as-hope-for-deficit-deal-fades/ [10/20/11]
3 - blogs.abcnews.com/politicalpunch/2011/07/debt-ceiling-framework-where-they-landed.html [7/31/11]
4 - www.usnews.com/news/articles/2011/11/21/so-the-super-committee-failed-how-will-that-affect-you [11/21/11]
5 - bloomberg.com/news/2011-08-06/u-s-credit-rating-cut-by-s-p-for-first-time-on-deficit-reduction-accord.html [8/5/11]
6 - blogs.wsj.com/marketbeat/2011/11/21/sp-super-failure-wont-affect-us-credit-rating/?mod=google_news_blog [11/21/11]
7 - www.cnbc.com/id/45355898 [11/21/11]
8 - www.csmonitor.com/Business/Latest-News-Wires/2011/11/21/Super-committee-fails [11/21/11]
9 - www.foxnews.com/politics/2011/11/21/clock-ticks-down-to-super-committee-failure/ [11/21/11]
Sincerely,
William T. Morrissey, CFP®
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commerical St., Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.
Thursday, November 17, 2011
UNCERTAINTY OVER ITALY
Bond yields climb dangerously high. It looks like the EU may forego a bailout.
The Eurozone has another mess on its hands. On November 9, the yield on Italy's 10-year bond soared to 7.46% - an interest rate clearly unthinkable in the long run, a danger signal EU leaders had to address immediately.1
Bond yields above 7% have served as a kind of litmus test for the European Union. When 10-year yields topped 7% in Portugal and Ireland, those countries got bailouts, but a bailout for Italy is unlikely. Quite simply, Italy is too big to be rescued; it appears the nation will just have to save itself.
"Financial assistance is not in the cards." So said one Eurozone official (who preferred to remain anonymous) to Reuters; that official said that Italy would not even get a preventive credit line from the EU.1
Italy dwarfs Greece in economic magnitude. The Dallas-Fort Worth metroplex contributes about as much to the world economy as Greece does. In contrast, Italy is the third-largest economy in the Eurozone and the eighth-largest economy in the world. It is now carrying somewhere between $2.2-2.6 trillion in debt, making its debt ratio 110-130% of its 2010 GDP.1,2,3
Here's why a bailout seems off the table. Italy's sovereign debt is about €1.7 trillion; three times that of Spain, and almost six times that of Greece. Across the next three years, it will have to come up with roughly €650-700 billion to avoid default (so estimates a forecast from Capital Economics). Even with its future increase, the European Financial Stability Fund would be drawn down alarmingly by a bailout of that size. Since Italy is hardly the only EU nation still in trouble, the EFSF would probably be loath to commit to such a mammoth rescue. The three major players funding the EFSF are Germany, France and Italy.2,4
Guess what EU nation is one of the world's key government bond markets. That's right: Italy. Its 10-year note rates rose above 7% on fear that it won't be able to repay what it owes on government debt. Are the higher yields going to be attractive to foreign investors? Hardly, given that Moody's and other credit rating agencies have given Italy downgrades.2
Name the EU member economy to which U.S. banks are most exposed. Again, the answer is Italy. According to Barclays Capital, that exposure amounted to about $269 billion in total claims as of July. European banks are six times as exposed to Italy ($998.7 billion) as they are to Greece ($162.4 billion).5
A call for a core Eurozone. Not surprisingly, French president Nicolas Sarkozy and German chancellor Angela Merkel have visions of an altered EU. On November 8, Sarkozy spoke of a two-tier Europe. It would feature a smaller and more financially integrated core Eurozone comprised of the most economically influential nations on the continent, with the bulk of the EU as a confederation of less economically influential countries with less say in policymaking.6
The weeks ahead are crucial. With the debt issues in Italy escalating, the European (and global) economy is looking at another major challenge. Can the European Central Bank buy up a whole bunch of Italian paper? If so, what concessions will Italy have to make? How contagious will this crisis prove, and how will it impact America?
Pronounced volatility may be the norm for the next few weeks or months on Wall Street. It is a good time to take a look at where and how you are invested, and a time to review your diversification and your outlook.
Citations.
1 - www.cnbc.com/id/45225893 [11/9/11]
2 - www.guardian.co.uk/business/2011/nov/09/italys-debt-crisis-ten-reasons-to-be-fearful [11/9/11]
2 - www.guardian.co.uk/business/2011/nov/09/italys-debt-crisis-ten-reasons-to-be-fearful [11/9/11]
3 - www.npr.org/templates/story/story.php?storyId=142158007 [11/9/11]
4 - www.npr.org/blogs/money/2011/11/09/142169733/why-italy-is-so-scary [11/9/11]
5 - www.nytimes.com/2011/07/12/business/global/italy-evolves-into-eus-next-weak-link.html [7/11/11]
6 -www.reuters.com/article/2011/11/09/us-eurozone-future-sarkozy-idUSTRE7A85VV20111109 [11/9/11]
The Eurozone has another mess on its hands. On November 9, the yield on Italy's 10-year bond soared to 7.46% - an interest rate clearly unthinkable in the long run, a danger signal EU leaders had to address immediately.1
Bond yields above 7% have served as a kind of litmus test for the European Union. When 10-year yields topped 7% in Portugal and Ireland, those countries got bailouts, but a bailout for Italy is unlikely. Quite simply, Italy is too big to be rescued; it appears the nation will just have to save itself.
"Financial assistance is not in the cards." So said one Eurozone official (who preferred to remain anonymous) to Reuters; that official said that Italy would not even get a preventive credit line from the EU.1
Italy dwarfs Greece in economic magnitude. The Dallas-Fort Worth metroplex contributes about as much to the world economy as Greece does. In contrast, Italy is the third-largest economy in the Eurozone and the eighth-largest economy in the world. It is now carrying somewhere between $2.2-2.6 trillion in debt, making its debt ratio 110-130% of its 2010 GDP.1,2,3
Here's why a bailout seems off the table. Italy's sovereign debt is about €1.7 trillion; three times that of Spain, and almost six times that of Greece. Across the next three years, it will have to come up with roughly €650-700 billion to avoid default (so estimates a forecast from Capital Economics). Even with its future increase, the European Financial Stability Fund would be drawn down alarmingly by a bailout of that size. Since Italy is hardly the only EU nation still in trouble, the EFSF would probably be loath to commit to such a mammoth rescue. The three major players funding the EFSF are Germany, France and Italy.2,4
Guess what EU nation is one of the world's key government bond markets. That's right: Italy. Its 10-year note rates rose above 7% on fear that it won't be able to repay what it owes on government debt. Are the higher yields going to be attractive to foreign investors? Hardly, given that Moody's and other credit rating agencies have given Italy downgrades.2
Name the EU member economy to which U.S. banks are most exposed. Again, the answer is Italy. According to Barclays Capital, that exposure amounted to about $269 billion in total claims as of July. European banks are six times as exposed to Italy ($998.7 billion) as they are to Greece ($162.4 billion).5
A call for a core Eurozone. Not surprisingly, French president Nicolas Sarkozy and German chancellor Angela Merkel have visions of an altered EU. On November 8, Sarkozy spoke of a two-tier Europe. It would feature a smaller and more financially integrated core Eurozone comprised of the most economically influential nations on the continent, with the bulk of the EU as a confederation of less economically influential countries with less say in policymaking.6
The weeks ahead are crucial. With the debt issues in Italy escalating, the European (and global) economy is looking at another major challenge. Can the European Central Bank buy up a whole bunch of Italian paper? If so, what concessions will Italy have to make? How contagious will this crisis prove, and how will it impact America?
Pronounced volatility may be the norm for the next few weeks or months on Wall Street. It is a good time to take a look at where and how you are invested, and a time to review your diversification and your outlook.
Citations.
1 - www.cnbc.com/id/45225893 [11/9/11]
2 - www.guardian.co.uk/business/2011/nov/09/italys-debt-crisis-ten-reasons-to-be-fearful [11/9/11]
2 - www.guardian.co.uk/business/2011/nov/09/italys-debt-crisis-ten-reasons-to-be-fearful [11/9/11]
3 - www.npr.org/templates/story/story.php?storyId=142158007 [11/9/11]
4 - www.npr.org/blogs/money/2011/11/09/142169733/why-italy-is-so-scary [11/9/11]
5 - www.nytimes.com/2011/07/12/business/global/italy-evolves-into-eus-next-weak-link.html [7/11/11]
6 -www.reuters.com/article/2011/11/09/us-eurozone-future-sarkozy-idUSTRE7A85VV20111109 [11/9/11]
Thursday, November 10, 2011
YOUR ANNUAL FINANCIAL TO-DO LIST
Things you can do before and for the New Year.
The end of the year is a good time to review your personal finances. What are your financial, business or life priorities for 2012? Try to specify the goals you want to accomplish. Think about the consistent investing, saving or budgeting methods you could use to realize them. Also, consider these year-end moves.
Think about adjusting or timing your income and tax deductions. If you earn a lot of money and have the option of postponing a portion of the taxable income you will make in 2011 until 2012, this decision can bring you some tax savings. You might also consider accelerating payment of deductible expenses if you are close to the line on itemized deductions – another way to potentially save some bucks.
Think about putting more in your 401(k) or 403(b). In 2011, you can contribute up to $16,500 per year to these accounts with a $5,500 catch-up contribution also allowed if you are age 50 or older. Has your 2011 contribution reached the annual limit? There is still time to put more into your employer-sponsored retirement plan.1
The IRS has announced 2012 contribution limits for 401(k) and 403(b) accounts, most 457 plans and the federal government’s Thrift Savings Plan (TSP). The annual contribution limit for each of these retirement plans will be $17,000 next year; the catch-up contribution again maxes out at $5,500.1
On a related note, SIMPLE IRA contribution limits won’t change next year. Up to $11,500 can be contributed to a SIMPLE IRA in 2012, $14,000 if you are 50 or older.2
Can you max out your IRA contribution at the start of 2012? If you can do it, do it early - the sooner you make your contribution, the more interest those assets will earn. (If you haven’t yet made your 2011 IRA contribution, you can still do so through April 17, 2012.)
The IRS has decided that IRA contribution limits won’t increase next year. In 2012 you will be able to contribute up to $5,000 to a Roth or traditional IRA if you are age 49 or younger, and up to $6,000 if you are age 50 and older (though your MAGI may affect how much you can put into a Roth IRA).3
The IRS has also boosted the income limits for a tax deduction for traditional IRA contributions. If you participate in a workplace retirement plan in 2012, the MAGI phase-out ranges will be $58,000-68,000 for singles and heads of households and $92,000-112,000 for couples. (In 2011, those phase-out ranges are set $2,000 lower.) If you own an IRA, you aren’t covered by a workplace retirement plan and you are married and filing jointly, the 2012 phase-out range is $173,000-183,000 based on a couple’s combined MAGI, hiked by $4,000 from 2011.3
Should you go Roth between now and the end of 2012? While you can no longer divide the income from a Roth IRA conversion across two years of federal tax returns, converting a traditional IRA into a Roth before 2013 may make sense for another reason: federal taxes might be higher in 2013. Congress extended the Bush-era tax cuts through the end of 2012; that sunset may not be delayed any further.4
Some MAGI phase-out limits affect Roth IRA contributions. These phase-out limits have been adjusted north for 2012. Next year, phase-outs will kick in at $173,000 for joint filers and $110,000 for single filers. (The 2011 phase-outs respectively kick in at $169,000 and $107,000.) Should your MAGI prevent you from contributing to a Roth IRA at all, you still have a chance to contribute to a traditional IRA in 2012 and then roll those IRA assets over into a Roth.3,5
Consult a tax or financial professional before you make any IRA moves. You will want see how it may affect your overall financial picture. The tax consequences of a Roth conversion can get sticky if you own multiple traditional IRAs.
If you are retired and older than 70½, don’t forget an RMD. Retirees over age 70½ must take Required Minimum Distributions from traditional IRAs and 401(k)s by December 31, 2012. Remember that the IRS penalty for failing to take an RMD equals 50% of the RMD amount.6
If you have turned or will turn 70½ in 2011, you can postpone your first IRA RMD until April 1, 2012. The downside of that is that you will have to take two IRA RMDs next year, both taxable events – you will have to make your 2011 tax year withdrawal by April 1, 2012 and your 2012 tax year withdrawal by December 31, 2012.6
Plan your RMDs wisely. If you do so, you may end up limiting or avoiding possible taxes on your Social Security income. Some Social Security recipients don’t know about the “provisional income” rule – if your modified AGI plus 50% of your Social Security benefits surpasses a certain level, then a portion of your Social Security benefits become taxable. For tax year 2011, Social Security benefits start to be taxed at provisional income levels of $32,000 for joint filers and $25,000 for single filers.7
Consider the tax impact of any 2011 transactions. Did you sell any real property this year – or do you plan to before the year ends? Did you start a business? Are you thinking about exercising a stock option? Could any large commissions or bonuses come your way before the end of the year? Did you sell an investment that was held outside of a tax-deferred account? Any of these moves might have a big impact on your taxes.
You may wish to make a charitable gift before New Year’s Day. Make a charitable contribution this year and you can claim the deduction on your 2011 return.
You could make December the “13th month”. Can you make a January mortgage payment in December, or make a lump sum payment on your mortgage balance? If you have a fixed-rate mortgage, a lump sum payment can reduce the home loan amount and the total interest paid on the loan by that much more. In a sense, paying down a debt is almost like getting a risk-free return.
Are you marrying next year, or do you know someone who is? The top of 2012 is a good time to review (and possibly change) beneficiaries to your 401(k) or 403(b) account, your IRA, your insurance policy and other assets. You may want to change beneficiaries in your will. It is also wise to take a look at your insurance coverage. If your last name is changing, you will need a new Social Security card. Lastly, assess your debts and the merits of your existing financial plans.
Are you returning from active duty? If so, go ahead and check the status of your credit, and the state of any tax and legal proceedings that might have been preempted by your orders. Review the status of your employee health insurance, and revoke any power of attorney you may have granted to another person.
Lastly, have you reviewed your withholding status? It may be time for a withholding adjustment if...
• You tend to pay a great deal of income tax annually.
• You tend to get a big refund each year from the IRS.
• You recently married or divorced.
• A family member recently passed away.
• You have a new job that pays you much more than your old one.
• You opened up your own business or started freelancing.
Don’t delay – get it done. Talk with a qualified financial or tax professional today, so you can focus on being healthy and wealthy in the New Year.
Citations.
1 www.irs.gov/newsroom/article/0,,id=248482,00.html [10/20/11]
2 www.irs.gov/retirement/participant/article/0,,id=211345,00.html [10/20/11]
3 money.usnews.com/money/blogs/planning-to-retire/2011/10/21/401k-and-ira-changes-coming-in-2012 [10/21/11]
4 www.post-gazette.com/pg/11032/1121982-28.stm [2/1/11]
5 www.irs.gov/retirement/participant/article/0,,id=202518,00.html [11/1/10]
6 www.montoyaregistry.com/Financial-Market.aspx?financial-market=required-ira-distributions&category=1 [9/15/11]
7 www.dentbaker.com/LinkClick.aspx?fileticket=5gZQwSHvjwQ%3d&tabid=36 [9/6/11]
The end of the year is a good time to review your personal finances. What are your financial, business or life priorities for 2012? Try to specify the goals you want to accomplish. Think about the consistent investing, saving or budgeting methods you could use to realize them. Also, consider these year-end moves.
Think about adjusting or timing your income and tax deductions. If you earn a lot of money and have the option of postponing a portion of the taxable income you will make in 2011 until 2012, this decision can bring you some tax savings. You might also consider accelerating payment of deductible expenses if you are close to the line on itemized deductions – another way to potentially save some bucks.
Think about putting more in your 401(k) or 403(b). In 2011, you can contribute up to $16,500 per year to these accounts with a $5,500 catch-up contribution also allowed if you are age 50 or older. Has your 2011 contribution reached the annual limit? There is still time to put more into your employer-sponsored retirement plan.1
The IRS has announced 2012 contribution limits for 401(k) and 403(b) accounts, most 457 plans and the federal government’s Thrift Savings Plan (TSP). The annual contribution limit for each of these retirement plans will be $17,000 next year; the catch-up contribution again maxes out at $5,500.1
On a related note, SIMPLE IRA contribution limits won’t change next year. Up to $11,500 can be contributed to a SIMPLE IRA in 2012, $14,000 if you are 50 or older.2
Can you max out your IRA contribution at the start of 2012? If you can do it, do it early - the sooner you make your contribution, the more interest those assets will earn. (If you haven’t yet made your 2011 IRA contribution, you can still do so through April 17, 2012.)
The IRS has decided that IRA contribution limits won’t increase next year. In 2012 you will be able to contribute up to $5,000 to a Roth or traditional IRA if you are age 49 or younger, and up to $6,000 if you are age 50 and older (though your MAGI may affect how much you can put into a Roth IRA).3
The IRS has also boosted the income limits for a tax deduction for traditional IRA contributions. If you participate in a workplace retirement plan in 2012, the MAGI phase-out ranges will be $58,000-68,000 for singles and heads of households and $92,000-112,000 for couples. (In 2011, those phase-out ranges are set $2,000 lower.) If you own an IRA, you aren’t covered by a workplace retirement plan and you are married and filing jointly, the 2012 phase-out range is $173,000-183,000 based on a couple’s combined MAGI, hiked by $4,000 from 2011.3
Should you go Roth between now and the end of 2012? While you can no longer divide the income from a Roth IRA conversion across two years of federal tax returns, converting a traditional IRA into a Roth before 2013 may make sense for another reason: federal taxes might be higher in 2013. Congress extended the Bush-era tax cuts through the end of 2012; that sunset may not be delayed any further.4
Some MAGI phase-out limits affect Roth IRA contributions. These phase-out limits have been adjusted north for 2012. Next year, phase-outs will kick in at $173,000 for joint filers and $110,000 for single filers. (The 2011 phase-outs respectively kick in at $169,000 and $107,000.) Should your MAGI prevent you from contributing to a Roth IRA at all, you still have a chance to contribute to a traditional IRA in 2012 and then roll those IRA assets over into a Roth.3,5
Consult a tax or financial professional before you make any IRA moves. You will want see how it may affect your overall financial picture. The tax consequences of a Roth conversion can get sticky if you own multiple traditional IRAs.
If you are retired and older than 70½, don’t forget an RMD. Retirees over age 70½ must take Required Minimum Distributions from traditional IRAs and 401(k)s by December 31, 2012. Remember that the IRS penalty for failing to take an RMD equals 50% of the RMD amount.6
If you have turned or will turn 70½ in 2011, you can postpone your first IRA RMD until April 1, 2012. The downside of that is that you will have to take two IRA RMDs next year, both taxable events – you will have to make your 2011 tax year withdrawal by April 1, 2012 and your 2012 tax year withdrawal by December 31, 2012.6
Plan your RMDs wisely. If you do so, you may end up limiting or avoiding possible taxes on your Social Security income. Some Social Security recipients don’t know about the “provisional income” rule – if your modified AGI plus 50% of your Social Security benefits surpasses a certain level, then a portion of your Social Security benefits become taxable. For tax year 2011, Social Security benefits start to be taxed at provisional income levels of $32,000 for joint filers and $25,000 for single filers.7
Consider the tax impact of any 2011 transactions. Did you sell any real property this year – or do you plan to before the year ends? Did you start a business? Are you thinking about exercising a stock option? Could any large commissions or bonuses come your way before the end of the year? Did you sell an investment that was held outside of a tax-deferred account? Any of these moves might have a big impact on your taxes.
You may wish to make a charitable gift before New Year’s Day. Make a charitable contribution this year and you can claim the deduction on your 2011 return.
You could make December the “13th month”. Can you make a January mortgage payment in December, or make a lump sum payment on your mortgage balance? If you have a fixed-rate mortgage, a lump sum payment can reduce the home loan amount and the total interest paid on the loan by that much more. In a sense, paying down a debt is almost like getting a risk-free return.
Are you marrying next year, or do you know someone who is? The top of 2012 is a good time to review (and possibly change) beneficiaries to your 401(k) or 403(b) account, your IRA, your insurance policy and other assets. You may want to change beneficiaries in your will. It is also wise to take a look at your insurance coverage. If your last name is changing, you will need a new Social Security card. Lastly, assess your debts and the merits of your existing financial plans.
Are you returning from active duty? If so, go ahead and check the status of your credit, and the state of any tax and legal proceedings that might have been preempted by your orders. Review the status of your employee health insurance, and revoke any power of attorney you may have granted to another person.
Lastly, have you reviewed your withholding status? It may be time for a withholding adjustment if...
• You tend to pay a great deal of income tax annually.
• You tend to get a big refund each year from the IRS.
• You recently married or divorced.
• A family member recently passed away.
• You have a new job that pays you much more than your old one.
• You opened up your own business or started freelancing.
Don’t delay – get it done. Talk with a qualified financial or tax professional today, so you can focus on being healthy and wealthy in the New Year.
Citations.
1 www.irs.gov/newsroom/article/0,,id=248482,00.html [10/20/11]
2 www.irs.gov/retirement/participant/article/0,,id=211345,00.html [10/20/11]
3 money.usnews.com/money/blogs/planning-to-retire/2011/10/21/401k-and-ira-changes-coming-in-2012 [10/21/11]
4 www.post-gazette.com/pg/11032/1121982-28.stm [2/1/11]
5 www.irs.gov/retirement/participant/article/0,,id=202518,00.html [11/1/10]
6 www.montoyaregistry.com/Financial-Market.aspx?financial-market=required-ira-distributions&category=1 [9/15/11]
7 www.dentbaker.com/LinkClick.aspx?fileticket=5gZQwSHvjwQ%3d&tabid=36 [9/6/11]
Tuesday, November 8, 2011
MONTHLY ECONOMIC UPDATE
MONTHLY QUOTE
“The family you come from isn’t as important as the family you’re going to have.”
– Ring Lardner
MONTHLY TIP
Do you need several credit cards? Maybe not, especially if you don’t use some of them. Unused credit cards can negatively affect you if you apply for a mortgage or personal loan as lenders look at your “available credit” (used and unused) to decide if you are overextended.
MONTHLY RIDDLE
I went into the woods and got it. I sat down to seek it. I brought it home with me because I couldn't find it. What is it?
Last month’s riddle: I'm dressed in a golden jacket. I take it off abruptly, accompanied by a loud noise. When I do, I become larger but weigh less. What am I?
Last month’s answer:
A kernel of corn.
November 2011
THE MONTH IN BRIEF
In October 2011, stocks had their best month in nearly 20 years. The S&P 500 climbed 10.77% as optimism returned; investors were relieved that Eurozone nations were progressing toward a solution to avert a Greek default. However, the month ended with a political curveball that threatened to sabotage the whole effort. At home, consumer confidence and mortgage rates were at generational lows while consumer spending, auto sales and new home sales held up. Occupy Wall Street gained the world’s attention, as the hazily defined movement may have inspired its first tangible financial change.1
DOMESTIC ECONOMIC HEALTH
In the month of October, the most reassuring stateside economic indicator was a quarterly one. The initial estimate of 3Q GDP was a 2.5% rise: precisely what economists were forecasting and exactly what was needed to silence arguments that we were on the cusp of a double-dip recession.2
Consumers had become pessimists, but they were still spending enough money to move the economy along. They weren’t happy: the month’s final University of Michigan consumer sentiment survey came in at 60.9, better than the preceding month’s 59.4 but still very low. The Conference Board’s October poll fell to an abysmal 39.8. Yet personal spending had improved by 0.6% in September, even as incomes only rose 0.1% in that month.3,4
At both the mall and the factory, there were still signs of vitality. The latest purchasing manager indexes from the Institute for Supply Management showed mild sector expansion: 50.8 in October for the manufacturing index, 53.0 in September for the service sector index. Retail sales zoomed north 1.1% in September, according to the Commerce Department. U.S. auto sales posted a 7.5% monthly gain in October. Overall durable goods orders retreated 0.8% in September, yet there was a 1.7% gain in hard good orders ex-transportation.5,6,7,8,9
Moderate inflation was also alive and well; the federal government’s Consumer Price Index showed annualized inflation reaching 3.9% in September; annualized core CPI was unchanged from the August reading of 2.0%. The CPI posted a 0.3% monthly gain for September while the Producer Price Index went up 0.8% after a flat August.10
The jobless rate didn’t move for the third straight month; in September, it remained at 9.1%. On Capitol Hill, President Obama’s American Jobs Act stalled in the Senate and there were indications that the “super committee” of 12 legislators assigned to craft a deficit reduction plan wasn’t making much progress. President Obama used an executive order to speed up implementation of rules intended to ease the debt burden from college loans, and another to broaden the qualifying criteria for HARP, the federal government’s underutilized mortgage relief program. The Occupy Wall Street protest spread to other cities; while some of the protesters seemed naïve and poorly informed about the relationship of Main Street to Wall Street, they may have hit one of their targets. Late last month, Bank of America announced it was dropping its proposed $5 monthly fee on debit card use; other lenders considering debit card usage fees publicly reconsidered them.11,12
GLOBAL ECONOMIC HEALTH
Things were looking so much better in Europe, until one politician made a truly scary announcement on Halloween. Greek prime minister George Paparandou stunned the European Union with his intent to make the latest austerity cuts for Greece contingent on a public vote. On November 2, German Chancellor Angela
Merkel and French President Nicolas Sarkozy gave Paparandou an ultimatum: no more money from the EU or the IMF unless Greek voters approve the cuts. One day later, Paparandou scuttled the referendum and faces a potentially grim political future. In late October, key bankers and insurers within the Eurozone agreed to a 50% writedown on their Greek debt holdings; additionally, European finance ministers unveiled a plan to boost bank capital ratios to 9% or better by June and increase the size of the Eurozone bailout fund fourfold.13,14,15,35
So what was going on in Asian economies? Some inflation readings were lower than analysts expected: 4.4% for Indonesia; 4.2% for Thailand; 3.9% for South Korea. India’s PMI improved 1.6% in October to 52.0 and its exports surged 36% in the month. On the downside, Taiwan’s latest GDP reading was lower than anticipated, and so was China’s official PMI, which approached a three-year low last month.16
WORLD MARKETS
Looking at Morningstar’s figures for global indexes (calculated in USD terms), we see some impressive one-month rebounds from September. England’s FTSE 100 went +8.11% and the French CAC 40 +8.75%, but that paled in comparison to the German DAX at +11.62% and Hong Kong’s Hang Seng at +12.50%. Other nice performances: India’s Sensex, +7.60%; Australia’s All Ordinaries, +7.13%; the TSX Composite of Canada, +5.40%; the Shanghai Composite of China, +4.62%; Japan’s Nikkei 225, +3.31%. The MSCI World Index rose 10.26% last month while the MSCI Emerging Market Index gained 13.08%.17,18
COMMODITIES MARKETS
Metals rebounded in October, as follows: gold, +6.3%; silver, +14.2%; copper, +15.0%; platinum, +5.5%; palladium, +6.0%. Gold ended up +21.3% YTD when October concluded. Oil rose $13.99 on the month, settling at $93.19 a barrel on Halloween. The real yield of the 10-year note (already down to 0.17% on September 30) diminished to 0.08% by October 31. The U.S. Dollar Index retreated 3.03% last month.19,20,21,22,23
REAL ESTATE
There was some good news: the Census Bureau reported housing starts up by a whopping 15.0% for September, and it said new home sales improved by 5.7% in that month. The August edition of the S&P/Case-Shiller Home Price Index posted an overall advance for the third month in a row (0.2%), with prices rising in 10 of 20 metro areas and the year-over-year price decline shrinking to just 3.8%.24,25,26
On the downside, the National Association of Realtors said existing home sales fell 3.0% for September, leaving sales on pace for a 2012 total of 4.91 million; this was be precisely the same amount of residential resales as 2010, that year being the worst on record for the category since 1997. NAR also said that pending home sales slipped 4.6% in September (economists polled by Bloomberg had forecast a 0.4% gain). 27,28
Mortgage rates went up in October. Freddie Mac’s October 27 Primary Mortgage Market Survey showed the average rate on the 30-year FRM at 4.10%, up from the bedrock-low 4.01% on September 29. Other average interest rates moved as follows during that interval: 5/1-year ARMs, from 3.02% to 3.08%; 1-year ARMs, from 2.83% to 2.90%; 15-year FRMs, from 3.28% to 3.38%.29
LOOKING BACK…LOOKING FORWARD
This sterling market month started and ended with sour notes: the Dow’s worst trading days of October were October 1 and Halloween. Those notes aside, October was positively amazing for the blue chips. In percentage terms, the DJIA had its finest month since October 2002 (and that was with a 2.26% fall on Halloween). All 30 components advanced; the last month in which that happened was September 2010. Also worth noting: the NASDAQ had its best month since September 2010.
Here was the tale of the tape at the end of October. 1
% CHANGE
Y-T-D
1-MO CHG
1-YR CHG
10-YR AVG
DJIA
+3.26
+9.54
+7.46
+3.17
NASDAQ
+1.19
+11.14
+7.17
+5.88
S&P 500
-0.35
+10.77
+5.82
+1.83
REAL YIELD
10/31 RATE
1 YR AGO
5 YRS AGO
10 YRS AGO
10 YR TIPS
0.08%
0.49%
2.34%
3.50%
Sources: online.wsj.com, bigcharts.com, treasury.gov - 10/31/111,30,31,32,33
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.
These returns do not include dividends.
This is the time of year many investors look forward to; November often marks the start of the traditional fall-winter “sweet spot” for the market. According to the Stock Trader’s Almanac, the S&P 500 has advanced in 57% of Novembers since 1928, with an average gain of 0.78%. Not only that, November has been the second-best month of the year for the S&P 500 since 1950. However, the yet-unresolved situation in Europe is hanging over the market like a cloud; Europe is the market mover now and for the near future. The current Greek government may or may not survive a seemingly inevitable confidence vote; Greek PM George Papandreou’s recent backtrack on a bailout referendum only adds to the uncertainty. So November proceeds with a caution flag for investors; in the best-case scenario, EU pressure on the Papandreou government and a calming of internal Greek political strife lowers that flag.34, 35
UPCOMING ECONOMIC RELEASES: The rest of November offers the following news items: the October ISM service sector index (11/3), the October unemployment report (11/4), September’s wholesale inventories (11/9), the initial University of Michigan November consumer sentiment survey (11/11), the October PPI, October retail sales and September business inventories (11/15), October’s CPI and industrial output (11/16), October housing starts and building permits (11/17), the Conference Board’s October Leading Economic Indicators index (11/18), October existing home sales (11/21), the latest FOMC minutes and the BEA’s second estimate of 3Q growth (11/22), the October consumer spending and durable goods orders reports and the final University of Michigan October consumer sentiment survey (11/23), October new home sales (11/28), the September Case-Shiller home price index and the Conference Board’s November consumer confidence snapshot (11/29), and finally the October pending home sales report and a new Beige Book from the Federal Reserve (11/30).
.
Citations.
1 - blogs.wsj.com/marketbeat/2011/10/31/data-points-u-s-markets-60/ [10/31/11]
2 - abcnews.go.com/Business/gdp-grew-25-percent-boosted-consumer-spending-double/story?id=14821833 [10/27/11]
3 – www.foxbusiness.com/markets/2011/10/28/consumer-spending-rises-weak-incomes-worry/ [10/28/11]
4 - www.npr.org/blogs/thetwo-way/2011/10/25/141683694/consumer-confidence-back-down-to-recession-level [10/25/11]
5 - www.ism.ws/ISMReport/MfgROB.cfm [11/1/11]
6 – www.ism.ws/ISMReport/NonMfgROB.cfm [10/5/11]
7 - www.latimes.com/business/la-fi-economy-retail-20111014,0,1716584.story?track=rss [10/14/11]
8 - online.wsj.com/article/
SB10001424052970204528204577011691060440660.html [11/1/11]
9 - www.forbes.com/2011/10/26/durable-goods-order-rise-extransportation-mortgage-apps-rise-marketnewsvideo.html [10/26/11]
10 - www.nytimes.com/2011/10/20/business/economy/us-consumer-inflation-subdued-housing-starts-up.html [10/19/11]
11 – www.marketwatch.com/story/september-data-show-improvement-in-jobs-market-2011-10-07 [10/7/11]
12 - bottomline.msnbc.msn.com/_news/2011/11/01/8583136-after-debit-card-battle-beware-of-more-bank-fees [11/1/11]
13 - www.reuters.com/article/2011/10/31/us-greece-referendum-analysts-idUSTRE79U7GO20111031 [10/31/11]
14 - www.marketwatch.com/story/greek-bondholders-to-take-50-haircut-2011-10-26 [10/27/11]
15 - www.guardian.co.uk/world/2011/nov/02/greece-ultimatum-austerity-forego-eu?intcmp=239 [11/2/11]
17 - news.morningstar.com/index/indexreturn.html [11/1/11]
18 -mscibarra.com/products/indices/international_equity_indices/gimi/
stdindex/performance.html [10/31/11]
19 - www.bullionpricestoday.com/bullion-prices-rally-in-october-2011/ [10/31/11]
20 - www.marketwatch.com/gold-futures-drop-as-us-dollar-surges-2011-10-31 [10/31/11]
21 - online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_curr_dtabnk&symb=DXY [11/2/11]
22 - blogs.wsj.com/marketbeat/2011/10/31/data-points-energy-metals-528/ [10/31/11]
23 – www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2011 [11/1/11]
24 – www.thestreet.com/story/11283665/1/raise-the-roof-housing-starts-up-15-in-september.html [10/20/11]
25 - marketwatch.com/story/new-us-home-sales-rise-as-prices-tumble-2011-10-26 [10/26/11]
26 - articles.latimes.com/2011/oct/25/business/la-fi-home-prices-20111026 [10/25/11]
27 - ajc.com/business/sales-of-previously-occupied-1206303.html [10/20/11]
28 - bloomberg.com/news/2011-10-27/pending-sales-of-u-s-existing-homes-unexpectedly-falls-4-6-on-demand-ebb.html [10/27/11]
29 - freddiemac.com/pmms/ [11/2/11]
30 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [11/2/11]
31 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=11%2F1%2F10&x=0&y=0 [11/2/11]
31 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=11%2F1F2%2F10&x=10&y=18 [11/2/11]
31 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=11%2F1%2F10&x=0&y=0 [11/2/11]
31 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F31%2F01&x=0&y=0 [11/2/11]
31 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=10%2F31%2F01&x=0&y=0 [11/2/11]
31 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=10%2F31%2F01&x=0&y=0 [11/2/11]
32 - www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [11/2/11]
33 - www.treasurydirect.gov/instit/annceresult/
press/preanre/2001/ofm71101.pdf [7/11/01]
34 - www.cnbc.com/id/45082000 [11/2/11]
35 - www.nytimes.com/2011/11/04/world/europe/greek-leaders-split-on-euro-referendum.html [11/3/11]
“The family you come from isn’t as important as the family you’re going to have.”
– Ring Lardner
MONTHLY TIP
Do you need several credit cards? Maybe not, especially if you don’t use some of them. Unused credit cards can negatively affect you if you apply for a mortgage or personal loan as lenders look at your “available credit” (used and unused) to decide if you are overextended.
MONTHLY RIDDLE
I went into the woods and got it. I sat down to seek it. I brought it home with me because I couldn't find it. What is it?
Last month’s riddle: I'm dressed in a golden jacket. I take it off abruptly, accompanied by a loud noise. When I do, I become larger but weigh less. What am I?
Last month’s answer:
A kernel of corn.
November 2011
THE MONTH IN BRIEF
In October 2011, stocks had their best month in nearly 20 years. The S&P 500 climbed 10.77% as optimism returned; investors were relieved that Eurozone nations were progressing toward a solution to avert a Greek default. However, the month ended with a political curveball that threatened to sabotage the whole effort. At home, consumer confidence and mortgage rates were at generational lows while consumer spending, auto sales and new home sales held up. Occupy Wall Street gained the world’s attention, as the hazily defined movement may have inspired its first tangible financial change.1
DOMESTIC ECONOMIC HEALTH
In the month of October, the most reassuring stateside economic indicator was a quarterly one. The initial estimate of 3Q GDP was a 2.5% rise: precisely what economists were forecasting and exactly what was needed to silence arguments that we were on the cusp of a double-dip recession.2
Consumers had become pessimists, but they were still spending enough money to move the economy along. They weren’t happy: the month’s final University of Michigan consumer sentiment survey came in at 60.9, better than the preceding month’s 59.4 but still very low. The Conference Board’s October poll fell to an abysmal 39.8. Yet personal spending had improved by 0.6% in September, even as incomes only rose 0.1% in that month.3,4
At both the mall and the factory, there were still signs of vitality. The latest purchasing manager indexes from the Institute for Supply Management showed mild sector expansion: 50.8 in October for the manufacturing index, 53.0 in September for the service sector index. Retail sales zoomed north 1.1% in September, according to the Commerce Department. U.S. auto sales posted a 7.5% monthly gain in October. Overall durable goods orders retreated 0.8% in September, yet there was a 1.7% gain in hard good orders ex-transportation.5,6,7,8,9
Moderate inflation was also alive and well; the federal government’s Consumer Price Index showed annualized inflation reaching 3.9% in September; annualized core CPI was unchanged from the August reading of 2.0%. The CPI posted a 0.3% monthly gain for September while the Producer Price Index went up 0.8% after a flat August.10
The jobless rate didn’t move for the third straight month; in September, it remained at 9.1%. On Capitol Hill, President Obama’s American Jobs Act stalled in the Senate and there were indications that the “super committee” of 12 legislators assigned to craft a deficit reduction plan wasn’t making much progress. President Obama used an executive order to speed up implementation of rules intended to ease the debt burden from college loans, and another to broaden the qualifying criteria for HARP, the federal government’s underutilized mortgage relief program. The Occupy Wall Street protest spread to other cities; while some of the protesters seemed naïve and poorly informed about the relationship of Main Street to Wall Street, they may have hit one of their targets. Late last month, Bank of America announced it was dropping its proposed $5 monthly fee on debit card use; other lenders considering debit card usage fees publicly reconsidered them.11,12
GLOBAL ECONOMIC HEALTH
Things were looking so much better in Europe, until one politician made a truly scary announcement on Halloween. Greek prime minister George Paparandou stunned the European Union with his intent to make the latest austerity cuts for Greece contingent on a public vote. On November 2, German Chancellor Angela
Merkel and French President Nicolas Sarkozy gave Paparandou an ultimatum: no more money from the EU or the IMF unless Greek voters approve the cuts. One day later, Paparandou scuttled the referendum and faces a potentially grim political future. In late October, key bankers and insurers within the Eurozone agreed to a 50% writedown on their Greek debt holdings; additionally, European finance ministers unveiled a plan to boost bank capital ratios to 9% or better by June and increase the size of the Eurozone bailout fund fourfold.13,14,15,35
So what was going on in Asian economies? Some inflation readings were lower than analysts expected: 4.4% for Indonesia; 4.2% for Thailand; 3.9% for South Korea. India’s PMI improved 1.6% in October to 52.0 and its exports surged 36% in the month. On the downside, Taiwan’s latest GDP reading was lower than anticipated, and so was China’s official PMI, which approached a three-year low last month.16
WORLD MARKETS
Looking at Morningstar’s figures for global indexes (calculated in USD terms), we see some impressive one-month rebounds from September. England’s FTSE 100 went +8.11% and the French CAC 40 +8.75%, but that paled in comparison to the German DAX at +11.62% and Hong Kong’s Hang Seng at +12.50%. Other nice performances: India’s Sensex, +7.60%; Australia’s All Ordinaries, +7.13%; the TSX Composite of Canada, +5.40%; the Shanghai Composite of China, +4.62%; Japan’s Nikkei 225, +3.31%. The MSCI World Index rose 10.26% last month while the MSCI Emerging Market Index gained 13.08%.17,18
COMMODITIES MARKETS
Metals rebounded in October, as follows: gold, +6.3%; silver, +14.2%; copper, +15.0%; platinum, +5.5%; palladium, +6.0%. Gold ended up +21.3% YTD when October concluded. Oil rose $13.99 on the month, settling at $93.19 a barrel on Halloween. The real yield of the 10-year note (already down to 0.17% on September 30) diminished to 0.08% by October 31. The U.S. Dollar Index retreated 3.03% last month.19,20,21,22,23
REAL ESTATE
There was some good news: the Census Bureau reported housing starts up by a whopping 15.0% for September, and it said new home sales improved by 5.7% in that month. The August edition of the S&P/Case-Shiller Home Price Index posted an overall advance for the third month in a row (0.2%), with prices rising in 10 of 20 metro areas and the year-over-year price decline shrinking to just 3.8%.24,25,26
On the downside, the National Association of Realtors said existing home sales fell 3.0% for September, leaving sales on pace for a 2012 total of 4.91 million; this was be precisely the same amount of residential resales as 2010, that year being the worst on record for the category since 1997. NAR also said that pending home sales slipped 4.6% in September (economists polled by Bloomberg had forecast a 0.4% gain). 27,28
Mortgage rates went up in October. Freddie Mac’s October 27 Primary Mortgage Market Survey showed the average rate on the 30-year FRM at 4.10%, up from the bedrock-low 4.01% on September 29. Other average interest rates moved as follows during that interval: 5/1-year ARMs, from 3.02% to 3.08%; 1-year ARMs, from 2.83% to 2.90%; 15-year FRMs, from 3.28% to 3.38%.29
LOOKING BACK…LOOKING FORWARD
This sterling market month started and ended with sour notes: the Dow’s worst trading days of October were October 1 and Halloween. Those notes aside, October was positively amazing for the blue chips. In percentage terms, the DJIA had its finest month since October 2002 (and that was with a 2.26% fall on Halloween). All 30 components advanced; the last month in which that happened was September 2010. Also worth noting: the NASDAQ had its best month since September 2010.
Here was the tale of the tape at the end of October. 1
% CHANGE
Y-T-D
1-MO CHG
1-YR CHG
10-YR AVG
DJIA
+3.26
+9.54
+7.46
+3.17
NASDAQ
+1.19
+11.14
+7.17
+5.88
S&P 500
-0.35
+10.77
+5.82
+1.83
REAL YIELD
10/31 RATE
1 YR AGO
5 YRS AGO
10 YRS AGO
10 YR TIPS
0.08%
0.49%
2.34%
3.50%
Sources: online.wsj.com, bigcharts.com, treasury.gov - 10/31/111,30,31,32,33
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.
These returns do not include dividends.
This is the time of year many investors look forward to; November often marks the start of the traditional fall-winter “sweet spot” for the market. According to the Stock Trader’s Almanac, the S&P 500 has advanced in 57% of Novembers since 1928, with an average gain of 0.78%. Not only that, November has been the second-best month of the year for the S&P 500 since 1950. However, the yet-unresolved situation in Europe is hanging over the market like a cloud; Europe is the market mover now and for the near future. The current Greek government may or may not survive a seemingly inevitable confidence vote; Greek PM George Papandreou’s recent backtrack on a bailout referendum only adds to the uncertainty. So November proceeds with a caution flag for investors; in the best-case scenario, EU pressure on the Papandreou government and a calming of internal Greek political strife lowers that flag.34, 35
UPCOMING ECONOMIC RELEASES: The rest of November offers the following news items: the October ISM service sector index (11/3), the October unemployment report (11/4), September’s wholesale inventories (11/9), the initial University of Michigan November consumer sentiment survey (11/11), the October PPI, October retail sales and September business inventories (11/15), October’s CPI and industrial output (11/16), October housing starts and building permits (11/17), the Conference Board’s October Leading Economic Indicators index (11/18), October existing home sales (11/21), the latest FOMC minutes and the BEA’s second estimate of 3Q growth (11/22), the October consumer spending and durable goods orders reports and the final University of Michigan October consumer sentiment survey (11/23), October new home sales (11/28), the September Case-Shiller home price index and the Conference Board’s November consumer confidence snapshot (11/29), and finally the October pending home sales report and a new Beige Book from the Federal Reserve (11/30).
.
Citations.
1 - blogs.wsj.com/marketbeat/2011/10/31/data-points-u-s-markets-60/ [10/31/11]
2 - abcnews.go.com/Business/gdp-grew-25-percent-boosted-consumer-spending-double/story?id=14821833 [10/27/11]
3 – www.foxbusiness.com/markets/2011/10/28/consumer-spending-rises-weak-incomes-worry/ [10/28/11]
4 - www.npr.org/blogs/thetwo-way/2011/10/25/141683694/consumer-confidence-back-down-to-recession-level [10/25/11]
5 - www.ism.ws/ISMReport/MfgROB.cfm [11/1/11]
6 – www.ism.ws/ISMReport/NonMfgROB.cfm [10/5/11]
7 - www.latimes.com/business/la-fi-economy-retail-20111014,0,1716584.story?track=rss [10/14/11]
8 - online.wsj.com/article/
SB10001424052970204528204577011691060440660.html [11/1/11]
9 - www.forbes.com/2011/10/26/durable-goods-order-rise-extransportation-mortgage-apps-rise-marketnewsvideo.html [10/26/11]
10 - www.nytimes.com/2011/10/20/business/economy/us-consumer-inflation-subdued-housing-starts-up.html [10/19/11]
11 – www.marketwatch.com/story/september-data-show-improvement-in-jobs-market-2011-10-07 [10/7/11]
12 - bottomline.msnbc.msn.com/_news/2011/11/01/8583136-after-debit-card-battle-beware-of-more-bank-fees [11/1/11]
13 - www.reuters.com/article/2011/10/31/us-greece-referendum-analysts-idUSTRE79U7GO20111031 [10/31/11]
14 - www.marketwatch.com/story/greek-bondholders-to-take-50-haircut-2011-10-26 [10/27/11]
15 - www.guardian.co.uk/world/2011/nov/02/greece-ultimatum-austerity-forego-eu?intcmp=239 [11/2/11]
17 - news.morningstar.com/index/indexreturn.html [11/1/11]
18 -mscibarra.com/products/indices/international_equity_indices/gimi/
stdindex/performance.html [10/31/11]
19 - www.bullionpricestoday.com/bullion-prices-rally-in-october-2011/ [10/31/11]
20 - www.marketwatch.com/gold-futures-drop-as-us-dollar-surges-2011-10-31 [10/31/11]
21 - online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_curr_dtabnk&symb=DXY [11/2/11]
22 - blogs.wsj.com/marketbeat/2011/10/31/data-points-energy-metals-528/ [10/31/11]
23 – www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2011 [11/1/11]
24 – www.thestreet.com/story/11283665/1/raise-the-roof-housing-starts-up-15-in-september.html [10/20/11]
25 - marketwatch.com/story/new-us-home-sales-rise-as-prices-tumble-2011-10-26 [10/26/11]
26 - articles.latimes.com/2011/oct/25/business/la-fi-home-prices-20111026 [10/25/11]
27 - ajc.com/business/sales-of-previously-occupied-1206303.html [10/20/11]
28 - bloomberg.com/news/2011-10-27/pending-sales-of-u-s-existing-homes-unexpectedly-falls-4-6-on-demand-ebb.html [10/27/11]
29 - freddiemac.com/pmms/ [11/2/11]
30 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [11/2/11]
31 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=11%2F1%2F10&x=0&y=0 [11/2/11]
31 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=11%2F1F2%2F10&x=10&y=18 [11/2/11]
31 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=11%2F1%2F10&x=0&y=0 [11/2/11]
31 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F31%2F01&x=0&y=0 [11/2/11]
31 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=10%2F31%2F01&x=0&y=0 [11/2/11]
31 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=10%2F31%2F01&x=0&y=0 [11/2/11]
32 - www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [11/2/11]
33 - www.treasurydirect.gov/instit/annceresult/
press/preanre/2001/ofm71101.pdf [7/11/01]
34 - www.cnbc.com/id/45082000 [11/2/11]
35 - www.nytimes.com/2011/11/04/world/europe/greek-leaders-split-on-euro-referendum.html [11/3/11]
The Latest on Social Security
Benefits increase for 2012. Ideas for reform are numerous.
Social Security gets its first COLA since 2009. As moderate inflation has made a comeback, the federal government has decided to boost Social Security benefits by 3.6% for 2012. This means an average increase of $39 per month for 55 million Social Security recipients ($467 for all of 2012). Also, more than 8 million Americans who get Supplemental Security Income will get $18 more per month ($216 for 2012).1
There are two things to note in the fine print.
· A COLA increase in Social Security means that Medicare premiums can also increase. Much of the 2012 COLA adjustment could effectively be eaten up this way, as Medicare premiums are automatically deducted from Social Security checks. (2012 Medicare Part B premiums should be announced before the end of October.)1,2
· Businesses should note that the Social Security wage base will rise to $110,100 for 2012. Currently, the federal government levies payroll tax on the first $106,800 of income; next year, that ceiling rises by $3,300. This means about 10 million more high-earning Americans will be subject to the payroll tax, which could vary anywhere from 3.1% to 6.2% in 2012 depending on legislative action (or inaction).1,2
Will the "super committee" of 12 make cuts to the program? It's uncertain; the deadline for the long-term budget reform plan from Congress falls on November 23, and the bipartisan and Joint Select Committee on Deficit Reduction (a.k.a. the "supercommittee") has been meeting more or less in secret, with AARP and other lobbyists pressuring them not to cut Social Security and Medicare.5
How might Social Security address its long-term shortfall? Proposals abound, from simple fixes to radical reforms.
· President Obama's fiscal commission has suggested raising the FICA cap. In this proposal, the payroll tax cap would gradually increase between now and 2050 so that 90% of wages earned in America would be subject to Social Security tax by the middle of the century. (This is how it used to be.) Under this plan, the taxable maximum would be $190,000 by 2020.2
· Rep. Paul Ryan (R-WI), Chair of the House Budget Committee, has authored the GOP's "Path to Prosperity" plan, the so-called "Ryan roadmap" that would encourage workers under age 55 to direct some of their payroll taxes into personal retirement accounts. Rep. Ryan's proposal would also index initial Social Security benefits for most retirees to price growth instead of average wage growth and set the age for Social Security eligibility at 67.3,4,5
· The conservative Heritage Foundation suggests a 5-year strategy in its Saving the American Dream proposal, which calls a reduction in Social Security benefits for the richest 9% of retirees, a $10,000 tax exemption for all who work past the federal retirement age, and the near-term elimination of taxation of Social Security income.6
· Republican presidential candidate Herman Cain has proposed replacing Social Security with the "Chilean model". In the early 1980s, Chile's government ended its retirement entitlement program and put retirement planning solely in the hands of individuals, who maintain personal retirement investment accounts and set their own contribution levels and retirement dates. Investor's Business Daily notes that on average, the program has yielded better than 9.2% compounded annual returns over 30 years.7
· Twelve fixes were suggested in a 2010 report issued by the U.S. Senate Special Committee on Aging, among them:
o A 3% cut in benefits
o Taking the payroll tax to 7.3%
o Hiking the full retirement age to 68 or older
o Increasing the Social Security averaging period that determines SSI
o Reducing the typical yearly COLA by 1% or .5%
o Reducing spousal benefits
o Investing some of Social Security's trust funds in equities
o Directing some estate tax revenues into Social Security's trust fund
Perhaps a fix lies somewhere within these proposals; unmodified or altered, alone or in combination.
How much retirement income do you have these days? With Social Security's future still a question mark, you may be thinking about where your retirement income will come from in the years ahead. A chat with the financial professional you know and trust may be worthwhile before 2012 arrives.
Citations.
1 - businessweek.com/ap/financialnews/D9QFGU602.htm [10/19/11]
2 - money.cnn.com/2011/10/19/pf/taxes/social_security_tax/ [10/19/11]
3 - montoyaregistry.com/Financial-Market.aspx?financial-market=will-you-have-an-adequate-retirement-cash-flow&category=3 [10/21/11]
4 - articles.cnn.com/2011-09-26/politics/politics_gop-paul-ryan_1_ryan-plan-paul-ryan-government-spending/3?_s=PM:POLITICS [9/26/11]
5 - cbpp.org/cms/index.cfm?fa=view&id=3308 [10/21/10]
6 - savingthedream.org/how-it-affects-you/retirees/ [10/21/11]
7 - investors.com/NewsAndAnalysis/Article/586464/201109291833/Cains-Chilean-Model.htm [10/12/11]
Social Security gets its first COLA since 2009. As moderate inflation has made a comeback, the federal government has decided to boost Social Security benefits by 3.6% for 2012. This means an average increase of $39 per month for 55 million Social Security recipients ($467 for all of 2012). Also, more than 8 million Americans who get Supplemental Security Income will get $18 more per month ($216 for 2012).1
There are two things to note in the fine print.
· A COLA increase in Social Security means that Medicare premiums can also increase. Much of the 2012 COLA adjustment could effectively be eaten up this way, as Medicare premiums are automatically deducted from Social Security checks. (2012 Medicare Part B premiums should be announced before the end of October.)1,2
· Businesses should note that the Social Security wage base will rise to $110,100 for 2012. Currently, the federal government levies payroll tax on the first $106,800 of income; next year, that ceiling rises by $3,300. This means about 10 million more high-earning Americans will be subject to the payroll tax, which could vary anywhere from 3.1% to 6.2% in 2012 depending on legislative action (or inaction).1,2
Will the "super committee" of 12 make cuts to the program? It's uncertain; the deadline for the long-term budget reform plan from Congress falls on November 23, and the bipartisan and Joint Select Committee on Deficit Reduction (a.k.a. the "supercommittee") has been meeting more or less in secret, with AARP and other lobbyists pressuring them not to cut Social Security and Medicare.5
How might Social Security address its long-term shortfall? Proposals abound, from simple fixes to radical reforms.
· President Obama's fiscal commission has suggested raising the FICA cap. In this proposal, the payroll tax cap would gradually increase between now and 2050 so that 90% of wages earned in America would be subject to Social Security tax by the middle of the century. (This is how it used to be.) Under this plan, the taxable maximum would be $190,000 by 2020.2
· Rep. Paul Ryan (R-WI), Chair of the House Budget Committee, has authored the GOP's "Path to Prosperity" plan, the so-called "Ryan roadmap" that would encourage workers under age 55 to direct some of their payroll taxes into personal retirement accounts. Rep. Ryan's proposal would also index initial Social Security benefits for most retirees to price growth instead of average wage growth and set the age for Social Security eligibility at 67.3,4,5
· The conservative Heritage Foundation suggests a 5-year strategy in its Saving the American Dream proposal, which calls a reduction in Social Security benefits for the richest 9% of retirees, a $10,000 tax exemption for all who work past the federal retirement age, and the near-term elimination of taxation of Social Security income.6
· Republican presidential candidate Herman Cain has proposed replacing Social Security with the "Chilean model". In the early 1980s, Chile's government ended its retirement entitlement program and put retirement planning solely in the hands of individuals, who maintain personal retirement investment accounts and set their own contribution levels and retirement dates. Investor's Business Daily notes that on average, the program has yielded better than 9.2% compounded annual returns over 30 years.7
· Twelve fixes were suggested in a 2010 report issued by the U.S. Senate Special Committee on Aging, among them:
o A 3% cut in benefits
o Taking the payroll tax to 7.3%
o Hiking the full retirement age to 68 or older
o Increasing the Social Security averaging period that determines SSI
o Reducing the typical yearly COLA by 1% or .5%
o Reducing spousal benefits
o Investing some of Social Security's trust funds in equities
o Directing some estate tax revenues into Social Security's trust fund
Perhaps a fix lies somewhere within these proposals; unmodified or altered, alone or in combination.
How much retirement income do you have these days? With Social Security's future still a question mark, you may be thinking about where your retirement income will come from in the years ahead. A chat with the financial professional you know and trust may be worthwhile before 2012 arrives.
Citations.
1 - businessweek.com/ap/financialnews/D9QFGU602.htm [10/19/11]
2 - money.cnn.com/2011/10/19/pf/taxes/social_security_tax/ [10/19/11]
3 - montoyaregistry.com/Financial-Market.aspx?financial-market=will-you-have-an-adequate-retirement-cash-flow&category=3 [10/21/11]
4 - articles.cnn.com/2011-09-26/politics/politics_gop-paul-ryan_1_ryan-plan-paul-ryan-government-spending/3?_s=PM:POLITICS [9/26/11]
5 - cbpp.org/cms/index.cfm?fa=view&id=3308 [10/21/10]
6 - savingthedream.org/how-it-affects-you/retirees/ [10/21/11]
7 - investors.com/NewsAndAnalysis/Article/586464/201109291833/Cains-Chilean-Model.htm [10/12/11]
Thursday, November 3, 2011
OBAMA’S NEW DEBT RELIEF INITIATIVES
Will they make a difference for homeowners and those with student loans?
President Obama has just announced two initiatives to try and ease debt burdens for Americans – moves that some view as election-minded appeals to the younger and middle-class voters that backed him wholeheartedly in 2008. With the American Jobs Act having stalled in the Senate, it isn’t surprising that these changes are coming through executive branch measures rather than proposed legislation.
When put into play, will these two ideas have a meaningful economic impact? Let’s take a closer look at them.
Could an executive order prompt a mortgage refi boom? If your home is underwater, the Obama administration is trying to offer you a better life raft. It is modifying HARP (the Home Affordable Refinance Program) to make more homeowners eligible for refinancing of mortgages backed by Fannie Mae and Freddie Mac.
So far, less than 900,000 homeowners have been able to refi via HARP; the Obama administration envisioned that the program would assist more than 4 million. HARP only worked for homeowners whose residences were less than 25% underwater, so the hardest-hit borrowers were ineligible. Factor in subpar credit scores and the fear that home values would only fall further, and you see why Housing Secretary Shaun Donovan concedes that HARP has “not reached the scale we had hoped.” 1
The retuned HARP relies on simple criteria. The revision to HARP could be a boon to underwater homeowners in California, Florida, Arizona and Nevada – not coincidentally, some key states for President Obama in the 2012 election. In the new version, it won’t matter how much value your home has lost. Lenders will be primarily concerned with two criteria:
• You will have to have a source of regular income.
• You will have to be current on your home loan. If you have missed one mortgage payment in the last 6 months or more than one in the past year, you will be ineligible. (If you have refinanced in the past 2½ years, you are also ineligible.)2
Secretary Donovan projects that a borrower able to refinance a home loan at 4% from a previous 5% or 6% interest rate could save as much as $2,500 a year. About 1 million homeowners could potentially benefit from the program – still, that’s less than a tenth of the 11 million who are underwater right now according to CoreLogic.1,3
There is one major hitch. No mortgage lender will be required to participate in the program; participation is completely voluntary. Again, the opportunity is only available if your home loan is guaranteed by Fannie Mae or Freddie Mac. Fannie and Freddie will come out with the full details on November 15 and the revised version of HARP is scheduled to be ready to roll on December 1.1
A “Pay as You Earn” plan for student loans. By the time Barack and Michelle Obama had both graduated from law school, they collectively had around $120,000 in college debts; their student loan payments exceeded their mortgage payments. Having “been there”, the President is using an executive order to accelerate the implementation of changes to reduce student loan payments and consolidate such loans. These changes were originally planned for 2014; they will now take effect at the start of 2012.5
Under the “Pay as You Earn” initiative, monthly student loan payments would be capped at 10% of a borrower’s discretionary income for 1.6 million Americans, instead of the current 15%. This could potentially means savings of hundreds of dollars per month. (If you wonder if you might qualify for this income-based repayment option, you may visit studentaid.gov/ibr to find out.)6
Additionally, up to 6 million borrowers will be allowed to merge debt stemming from government-issued and privately-issued student loans, resulting in one monthly payment. The interest rate on that payment could be up to 0.5% lower. The Obama administration says that for someone with two loans totaling $37,500 in debt, this consolidation could bring about nearly $1,000 in interest savings.6
The White House says that these changes could make life easier for up to 8 million taxpayers. However, there are currently more than 36 million taxpayers burdened by outstanding college loans.6
President Obama needs to retain the loyalty of younger voters in 2012 and win back the middle class. These initiatives may have major or minor impact, yet they will be appreciated.
Citations.
1 - nj.com/news/index.ssf/2011/10/obamas_new_mortgage_refinance.html [10/25/11]
2 - csmonitor.com/Commentary/the-monitors-view/2011/1024/Moral-blind-spots-in-Obama-mortgage-refinancing-scheme [10/24/11]
3 - investmentnews.com/article/20111026/FREE/111029954 [10/26/11]
4 - montoyaregistry.com/Financial-Market.aspx?financial-market=Six-steps-to-get-out-of-debt&category=29 [10/26/11]
5 - blogs.ajc.com/get-schooled-blog/2011/10/26/president-obama-announces-changes-to-federal-student-loan-repayments [10/26/11]
6 - dailyfinance.com/2011/10/26/obamas-new-student-loan-plan-will-it-let-you-pay-less/ [10/26/11]
President Obama has just announced two initiatives to try and ease debt burdens for Americans – moves that some view as election-minded appeals to the younger and middle-class voters that backed him wholeheartedly in 2008. With the American Jobs Act having stalled in the Senate, it isn’t surprising that these changes are coming through executive branch measures rather than proposed legislation.
When put into play, will these two ideas have a meaningful economic impact? Let’s take a closer look at them.
Could an executive order prompt a mortgage refi boom? If your home is underwater, the Obama administration is trying to offer you a better life raft. It is modifying HARP (the Home Affordable Refinance Program) to make more homeowners eligible for refinancing of mortgages backed by Fannie Mae and Freddie Mac.
So far, less than 900,000 homeowners have been able to refi via HARP; the Obama administration envisioned that the program would assist more than 4 million. HARP only worked for homeowners whose residences were less than 25% underwater, so the hardest-hit borrowers were ineligible. Factor in subpar credit scores and the fear that home values would only fall further, and you see why Housing Secretary Shaun Donovan concedes that HARP has “not reached the scale we had hoped.” 1
The retuned HARP relies on simple criteria. The revision to HARP could be a boon to underwater homeowners in California, Florida, Arizona and Nevada – not coincidentally, some key states for President Obama in the 2012 election. In the new version, it won’t matter how much value your home has lost. Lenders will be primarily concerned with two criteria:
• You will have to have a source of regular income.
• You will have to be current on your home loan. If you have missed one mortgage payment in the last 6 months or more than one in the past year, you will be ineligible. (If you have refinanced in the past 2½ years, you are also ineligible.)2
Secretary Donovan projects that a borrower able to refinance a home loan at 4% from a previous 5% or 6% interest rate could save as much as $2,500 a year. About 1 million homeowners could potentially benefit from the program – still, that’s less than a tenth of the 11 million who are underwater right now according to CoreLogic.1,3
There is one major hitch. No mortgage lender will be required to participate in the program; participation is completely voluntary. Again, the opportunity is only available if your home loan is guaranteed by Fannie Mae or Freddie Mac. Fannie and Freddie will come out with the full details on November 15 and the revised version of HARP is scheduled to be ready to roll on December 1.1
A “Pay as You Earn” plan for student loans. By the time Barack and Michelle Obama had both graduated from law school, they collectively had around $120,000 in college debts; their student loan payments exceeded their mortgage payments. Having “been there”, the President is using an executive order to accelerate the implementation of changes to reduce student loan payments and consolidate such loans. These changes were originally planned for 2014; they will now take effect at the start of 2012.5
Under the “Pay as You Earn” initiative, monthly student loan payments would be capped at 10% of a borrower’s discretionary income for 1.6 million Americans, instead of the current 15%. This could potentially means savings of hundreds of dollars per month. (If you wonder if you might qualify for this income-based repayment option, you may visit studentaid.gov/ibr to find out.)6
Additionally, up to 6 million borrowers will be allowed to merge debt stemming from government-issued and privately-issued student loans, resulting in one monthly payment. The interest rate on that payment could be up to 0.5% lower. The Obama administration says that for someone with two loans totaling $37,500 in debt, this consolidation could bring about nearly $1,000 in interest savings.6
The White House says that these changes could make life easier for up to 8 million taxpayers. However, there are currently more than 36 million taxpayers burdened by outstanding college loans.6
President Obama needs to retain the loyalty of younger voters in 2012 and win back the middle class. These initiatives may have major or minor impact, yet they will be appreciated.
Citations.
1 - nj.com/news/index.ssf/2011/10/obamas_new_mortgage_refinance.html [10/25/11]
2 - csmonitor.com/Commentary/the-monitors-view/2011/1024/Moral-blind-spots-in-Obama-mortgage-refinancing-scheme [10/24/11]
3 - investmentnews.com/article/20111026/FREE/111029954 [10/26/11]
4 - montoyaregistry.com/Financial-Market.aspx?financial-market=Six-steps-to-get-out-of-debt&category=29 [10/26/11]
5 - blogs.ajc.com/get-schooled-blog/2011/10/26/president-obama-announces-changes-to-federal-student-loan-repayments [10/26/11]
6 - dailyfinance.com/2011/10/26/obamas-new-student-loan-plan-will-it-let-you-pay-less/ [10/26/11]
Tuesday, October 25, 2011
Has Wall Street Learned from 2008?
Some market bears think very little has changed. They could be right.
Memories of 2008 are still fresh: The credit crisis; the collapse of Lehman Brothers and Washington Mutual; the federal takeover of Fannie and Freddie; the market downturn. There’s little doubt Wall Street would like to erase it all from its conscience, and maybe it has.
Part of the anger of the Occupy Wall Street movement comes from the perception that nothing has changed. While the Dodd-Frank Act (designed to make the financial system more accountable and transparent) is now taking effect, the Volcker Rule (intended to stop banks from trading for their own accounts) may be watered down or put off. Beyond that, the U.S. economic recovery from the Great Recession has sputtered and made people question the recent bullish sentiment.
Stocks have rebounded strongly since 2009, but there are still many factors to worry about; this may lead to a little contrarian thinking.
This bull market may be a diversion from a secular bear market. For most of 2011, the S&P 500 has been above 1,200 (a great rebound from the March 2009 low of 676). What was behind that? The short answer: a weak dollar. We haven’t exactly had a boom economy in that timeframe.1,2
Some analysts look at Wall Street right now and see a rerun of the 1970s, when you had momentous rallies masking a bear market that went from 1967-82. In addition, researchers at the Federal Reserve Bank of San Francisco are concerned about the possibility of a generational sell off; a potential market “headwind” for 10 or 20 years stemming from greying Baby Boomers getting out of stocks as they get closer to retirement, countered only partly by overseas investment.3,4
What has changed on Wall Street since 2008? Perhaps not much. The general perception that the CEOs of the big investment banks and mortgage companies whose thoughtlessness contributed to the Great Recession met with no real consequence seems to be taking hold, as evidenced by the Occupy Wall Street movement.
By the way, remember the furor directed at risky derivatives trading? In September 2011, the Comptroller of the Currency had recorded an 11% year-over-year increase in derivatives investment in the banking industry. Banks now hold almost $250 trillion of the contracts.5
A truly severe punishment of Wall Street would come at a dear price for Washington. Some of the biggest names from Wall Street (and the real estate sector) have also been major lobbyists and campaign contributors. According to the nonpartisan Center for Responsive Politics, the National Association of Realtors has contributed more than $40 million to federal-level political campaigns since 1989; Goldman Sachs has contributed almost $36 million since then, and Citigroup nearly $29 million. The financial, insurance and real estate industries have collectively spent over $4.6 billion in lobbying efforts since 1998.6,7
What is happening with the recovery? Not much. While unemployment is above 9%, underemployment is the real story – in September, 16.5% of Americans worked less than 40 hours a week. No wonder homes sit on the market and consumer spending increases mostly in response to rising food and energy prices. Wages even retreated 0.2% in September and incomes fell 0.1% - the first monthly decrease in income since October 2009. Assorted 2012 forecasts see slow or slowing growth in various European and Asian nations.8,9
Is there a bright side for Wall Street? Actually, there could be. The European Union is making decisive moves to address its debt crisis. Indicators still show that our economy is growing, not contracting; September was the best month for U.S. retail sales since March. Many analysts think that the Dodd-Frank regulations will discernibly impact the Wall Street mindset. Lastly, the strength and duration of seemingly every major bull market has been questioned by the bears; history may record that a secular bull market began in 2009, after all.10
Only time will tell. Over time, the stock market has faced some great challenges – and risen to meet them again and again. This time around, the hope is that Wall Street’s behavior (and behavioral assumptions) won’t sabotage the rally.
Citations.
1 - money.cnn.com/data/markets/sandp/ [10/13/11]
2 - moneywatch.bnet.com/economic-news/blog/financial-decoder/jill-on-money-stock-anniversary-mortgages-cash/5308/ [10/8/11]
3 - montoyaregistry.com/Financial-Market.aspx?financial-market=the-financial-security-rulebook-5-crucial-steps&category=3 [10/13/11]
4 - money.msn.com/retirement-investment/latest.aspx?post=9bb7f5b7-8c8a-4723-a543-7930cb51e2af [8/23/11]
5 - dealbook.nytimes.com/2011/09/23/banks-increase-holdings-in-derivatives/ [9/23/11]
6 - opensecrets.org/orgs/list.php?order=A [10/13/11]
7 - opensecrets.org/lobby/top.php?indexType=c [10/13/11]
8 - articles.latimes.com/2011/oct/08/business/la-fi-jobs-report-20111008 [10/8/11]
9 - businessweek.com/news/2011-09-30/u-s-economy-consumer-spending-cooled-in-august-as-wages-fell.html [9/30/11]
10 - latimes.com/business/la-fi-economy-retail-20111014,0,1716584.story?track=rss [10/14/11]
Memories of 2008 are still fresh: The credit crisis; the collapse of Lehman Brothers and Washington Mutual; the federal takeover of Fannie and Freddie; the market downturn. There’s little doubt Wall Street would like to erase it all from its conscience, and maybe it has.
Part of the anger of the Occupy Wall Street movement comes from the perception that nothing has changed. While the Dodd-Frank Act (designed to make the financial system more accountable and transparent) is now taking effect, the Volcker Rule (intended to stop banks from trading for their own accounts) may be watered down or put off. Beyond that, the U.S. economic recovery from the Great Recession has sputtered and made people question the recent bullish sentiment.
Stocks have rebounded strongly since 2009, but there are still many factors to worry about; this may lead to a little contrarian thinking.
This bull market may be a diversion from a secular bear market. For most of 2011, the S&P 500 has been above 1,200 (a great rebound from the March 2009 low of 676). What was behind that? The short answer: a weak dollar. We haven’t exactly had a boom economy in that timeframe.1,2
Some analysts look at Wall Street right now and see a rerun of the 1970s, when you had momentous rallies masking a bear market that went from 1967-82. In addition, researchers at the Federal Reserve Bank of San Francisco are concerned about the possibility of a generational sell off; a potential market “headwind” for 10 or 20 years stemming from greying Baby Boomers getting out of stocks as they get closer to retirement, countered only partly by overseas investment.3,4
What has changed on Wall Street since 2008? Perhaps not much. The general perception that the CEOs of the big investment banks and mortgage companies whose thoughtlessness contributed to the Great Recession met with no real consequence seems to be taking hold, as evidenced by the Occupy Wall Street movement.
By the way, remember the furor directed at risky derivatives trading? In September 2011, the Comptroller of the Currency had recorded an 11% year-over-year increase in derivatives investment in the banking industry. Banks now hold almost $250 trillion of the contracts.5
A truly severe punishment of Wall Street would come at a dear price for Washington. Some of the biggest names from Wall Street (and the real estate sector) have also been major lobbyists and campaign contributors. According to the nonpartisan Center for Responsive Politics, the National Association of Realtors has contributed more than $40 million to federal-level political campaigns since 1989; Goldman Sachs has contributed almost $36 million since then, and Citigroup nearly $29 million. The financial, insurance and real estate industries have collectively spent over $4.6 billion in lobbying efforts since 1998.6,7
What is happening with the recovery? Not much. While unemployment is above 9%, underemployment is the real story – in September, 16.5% of Americans worked less than 40 hours a week. No wonder homes sit on the market and consumer spending increases mostly in response to rising food and energy prices. Wages even retreated 0.2% in September and incomes fell 0.1% - the first monthly decrease in income since October 2009. Assorted 2012 forecasts see slow or slowing growth in various European and Asian nations.8,9
Is there a bright side for Wall Street? Actually, there could be. The European Union is making decisive moves to address its debt crisis. Indicators still show that our economy is growing, not contracting; September was the best month for U.S. retail sales since March. Many analysts think that the Dodd-Frank regulations will discernibly impact the Wall Street mindset. Lastly, the strength and duration of seemingly every major bull market has been questioned by the bears; history may record that a secular bull market began in 2009, after all.10
Only time will tell. Over time, the stock market has faced some great challenges – and risen to meet them again and again. This time around, the hope is that Wall Street’s behavior (and behavioral assumptions) won’t sabotage the rally.
Citations.
1 - money.cnn.com/data/markets/sandp/ [10/13/11]
2 - moneywatch.bnet.com/economic-news/blog/financial-decoder/jill-on-money-stock-anniversary-mortgages-cash/5308/ [10/8/11]
3 - montoyaregistry.com/Financial-Market.aspx?financial-market=the-financial-security-rulebook-5-crucial-steps&category=3 [10/13/11]
4 - money.msn.com/retirement-investment/latest.aspx?post=9bb7f5b7-8c8a-4723-a543-7930cb51e2af [8/23/11]
5 - dealbook.nytimes.com/2011/09/23/banks-increase-holdings-in-derivatives/ [9/23/11]
6 - opensecrets.org/orgs/list.php?order=A [10/13/11]
7 - opensecrets.org/lobby/top.php?indexType=c [10/13/11]
8 - articles.latimes.com/2011/oct/08/business/la-fi-jobs-report-20111008 [10/8/11]
9 - businessweek.com/news/2011-09-30/u-s-economy-consumer-spending-cooled-in-august-as-wages-fell.html [9/30/11]
10 - latimes.com/business/la-fi-economy-retail-20111014,0,1716584.story?track=rss [10/14/11]
Tuesday, October 18, 2011
Another Recession? Don't Believe It
Key indicators point to an economy (slowly) on the mend.
This year, assorted economists and journalists have contended that the U.S. is on the edge of a new recession. Yet recent indicators hint that the economy is doing a bit better than some analysts think.
U.S. retail sales were up 1.1% in September. This is the kind of monthly number that you might expect during a typical recession recovery, and it surpassed the +0.7% consensus forecast of economists polled by Bloomberg News. Additionally, the Commerce Department revised August retail spending (formerly flat) to +0.3%. The year-over-year numbers in the September report really impress: we see annual gains of 7.9% for overall retail sales, 10.1% for online retailers, 6.9% for the restaurant and nightlife component, 7.6% for clothing shops and 6.5% for home and garden stores.1,2,3
As Credit Suisse economist Jonathan Basile told CNBC.com, “The fear of recession recedes when you see a retail sales report like this.” Basile said he was revising Credit Suisse’s 3Q 2011 GDP forecast for the U.S. north from +2.5% to +2.9%.4
GDP did improve in the second quarter. Real GDP was +0.4% in the first quarter of 2011, but the third and final real GDP estimate for the second quarter from the Bureau of Economic Analysis was +1.3%.5
“As of today, the recovery is still underway,” Berkshire Hathaway CEO Warren Buffett commented at an October 4 Fortune Magazine conference. “Our railroad carried 200,000 carloads last week,” he said, referring to the Burlington Northern Santa Fe company. “That’s the highest total in three years. And that’s stuff moving around the country, supplying merchants and doing all kinds of things.”6
Other signs of growth & stability can be seen. Here in October 2011, many corporations appear to be in better shape: U.S. non-financial firms have $15 trillion of potentially liquid cash or investments on hand compared to $13.7 trillion a year ago. American residential investment spending is up by $9 billion since a low-water mark last spring; existing home sales rose 7.7% in August and the backlog of homes for sale fell to an 8.5-month supply from the previous 9.5-month inventory. The Institute for Supply Management’s twin purchasing manager indexes still show ongoing sector expansion; the service sector has grown for 22 months.7,8,9
The continued vitality in consumer spending and other encouraging factors points to a recovery. It may seem unimpressive or frustrating, but it doesn’t indicate a recession.
Citations.
1 - sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/10/14/bloomberg_articlesLT22VK6JTSEL.DTL [10/14/11]
2 - census.gov/retail/marts/www/marts_current.pdf [10/14/11]
3 - montoyaregistry.com/Financial-Market.aspx?financial-market=money-and-happiness&category=29 [10/7/11]
4 - cnbc.com/id/44906873 [9/30/11]
5 - bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm [9/29/11]
6 - businessweek.com/news/2011-10-07/rail-cargo-starts-to-peak-as-buffett-sees-no-recession-freight.html [10/7/11]
7 - washingtonpost.com/business/economy/the-simple-math-of-recession/2011/10/12/gIQAszvWiL_print.html [10/12/11]
8 - realtor.org/press_room/news_releases/2011/09/ehs_aug [9/21/11]
9 - ism.ws/ISMReport/NonMfgROB.cfm [10/5/11]
This year, assorted economists and journalists have contended that the U.S. is on the edge of a new recession. Yet recent indicators hint that the economy is doing a bit better than some analysts think.
U.S. retail sales were up 1.1% in September. This is the kind of monthly number that you might expect during a typical recession recovery, and it surpassed the +0.7% consensus forecast of economists polled by Bloomberg News. Additionally, the Commerce Department revised August retail spending (formerly flat) to +0.3%. The year-over-year numbers in the September report really impress: we see annual gains of 7.9% for overall retail sales, 10.1% for online retailers, 6.9% for the restaurant and nightlife component, 7.6% for clothing shops and 6.5% for home and garden stores.1,2,3
As Credit Suisse economist Jonathan Basile told CNBC.com, “The fear of recession recedes when you see a retail sales report like this.” Basile said he was revising Credit Suisse’s 3Q 2011 GDP forecast for the U.S. north from +2.5% to +2.9%.4
GDP did improve in the second quarter. Real GDP was +0.4% in the first quarter of 2011, but the third and final real GDP estimate for the second quarter from the Bureau of Economic Analysis was +1.3%.5
“As of today, the recovery is still underway,” Berkshire Hathaway CEO Warren Buffett commented at an October 4 Fortune Magazine conference. “Our railroad carried 200,000 carloads last week,” he said, referring to the Burlington Northern Santa Fe company. “That’s the highest total in three years. And that’s stuff moving around the country, supplying merchants and doing all kinds of things.”6
Other signs of growth & stability can be seen. Here in October 2011, many corporations appear to be in better shape: U.S. non-financial firms have $15 trillion of potentially liquid cash or investments on hand compared to $13.7 trillion a year ago. American residential investment spending is up by $9 billion since a low-water mark last spring; existing home sales rose 7.7% in August and the backlog of homes for sale fell to an 8.5-month supply from the previous 9.5-month inventory. The Institute for Supply Management’s twin purchasing manager indexes still show ongoing sector expansion; the service sector has grown for 22 months.7,8,9
The continued vitality in consumer spending and other encouraging factors points to a recovery. It may seem unimpressive or frustrating, but it doesn’t indicate a recession.
Citations.
1 - sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/10/14/bloomberg_articlesLT22VK6JTSEL.DTL [10/14/11]
2 - census.gov/retail/marts/www/marts_current.pdf [10/14/11]
3 - montoyaregistry.com/Financial-Market.aspx?financial-market=money-and-happiness&category=29 [10/7/11]
4 - cnbc.com/id/44906873 [9/30/11]
5 - bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm [9/29/11]
6 - businessweek.com/news/2011-10-07/rail-cargo-starts-to-peak-as-buffett-sees-no-recession-freight.html [10/7/11]
7 - washingtonpost.com/business/economy/the-simple-math-of-recession/2011/10/12/gIQAszvWiL_print.html [10/12/11]
8 - realtor.org/press_room/news_releases/2011/09/ehs_aug [9/21/11]
9 - ism.ws/ISMReport/NonMfgROB.cfm [10/5/11]
Tuesday, October 11, 2011
STOCKS IN THE FOURTH QUARTER
Can the last quarter of 2011 live up to historical averages?
Is a rally ahead? You may have heard that stocks tend to do well in the fourth quarter. History affirms that perception: while past performance is no guarantee of future results, the last quarter of the year has historically been the best quarter of the year for U.S. equities. As data from Bespoke Investment Group notes:
• The S&P 500 has averaged a +2.44% performance in fourth quarters since 1928.
• In the last 20 years, it has averaged +4.57% in fourth quarters.
• In the last 30 years, it has advanced in 24 of 30 fourth quarters with an average price return of better than 7%.1
Will the Street put its anxieties aside? Right now, you have a lot of uncertainty. Many analysts see a stock market unimpressed by tepid domestic growth and waiting fearfully for the other shoe to drop (meaning Greece).They see more pain ahead for U.S. investors. On the other hand, there is also talk of when a point of capitulation might be reached, i.e., is Wall Street simply ready to rally even in the face of the debt troubles in Europe and the slow recovery here.
You could argue that certain Wall Street psychologies (and tensions) aid 4Q rallies. After all, the pay of money managers relates to performance and there is renewed pressure on them to come through as the end of a year looms.
Could new optimism surface? Perhaps it is surfacing now. As the third quarter wrapped up, Reuters polled 350 stock market analysts worldwide. Their consensus forecast was that 18 of 19 major world stock indices would either advance or suffer insignificant losses in the fourth quarter (Taiwan’s TAIEX was the lone exception in the forecast).2
They also felt that two indices would achieve 2011 gains: South Korea’s Kospi, and the Dow Jones Industrial Average. They think the Dow will end 2011 up about 2%. The Dow was at -5.74% YTD at the closing bell on September 30.3,4
On a particularly bullish note, Bloomberg surveyed 12 Wall Street strategists in early October and found them collectively forecasting the greatest 4Q rally in 13 years. They think that the S&P 500 will rise 15% this quarter, which would mean a push to 1,300 by New Year’s Day.5
Stocks certainly are cheap. Bloomberg data also indicated that when the S&P nearly closed at bear market levels in early October, it was down to 12x reported earnings; valuations were lower than they had been at any point since 2009. At the end of September, the MSCI World Index was trading at just above 10x its 12-month forward earnings, well under its average of 14.3x earnings since 2001.2,5
Some analysts are optimistic about the coming quarters. Indeed, the 350 analysts surveyed by Reuters are envisioning some impressive bull runs. They think Russia’s RTSI will advance 32% between now and mid-2012; they feel Brazil’s Bovespa will rise approximately as much in the next three quarters. If you follow emerging markets, forecasts like these may not surprise you much. However, they also see double-digit advances for the Dow, Nikkei 225, All Ordinaries, CAC 40 and DAX by mid-2012.2
Historically, stocks have had impressive resilience. Here are two other encouraging statistics in the wake of the Dow and S&P’s double-digit third quarter drops:
• The Dow had 14 quarterly losses of 10% or more in the period from 1962-2009. In 79% of the ensuing quarters, the Dow pulled off a quarterly gain.
• The S&P suffered 11 quarterly losses of 10% or more during a stretch from 1981-2009. In 80% of the following quarters, it posted a quarterly gain.6
Another 4Q rally depends on many variables, but if Greece avoids default and 3Q earnings don’t disappoint, we might see a better end to 2011 than the bears anticipate.
Citations.1 - moneywatch.bnet.com/investing/blog/investment-insights/stocks-ready-for-fourth-quarter-rally/2833/ [10/3/11]
2 - reuters.com/article/2011/09/29/us-markets-stocks-poll-idUSTRE78S4EK20110929 [9/29/11]
3 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [10/7/11]
4 - cnbc.com/id/44729786 [9/30/11]
5 - bloomberg.com/news/2011-10-07/stock-index-futures-in-u-s-rally-after-employment-growth-beats-forecasts.html [10/7/11]
6 - cnbc.com/id/44677114/Third_Quarter_Pain_Fourth_Quarter_Gain [9/29/11]
Is a rally ahead? You may have heard that stocks tend to do well in the fourth quarter. History affirms that perception: while past performance is no guarantee of future results, the last quarter of the year has historically been the best quarter of the year for U.S. equities. As data from Bespoke Investment Group notes:
• The S&P 500 has averaged a +2.44% performance in fourth quarters since 1928.
• In the last 20 years, it has averaged +4.57% in fourth quarters.
• In the last 30 years, it has advanced in 24 of 30 fourth quarters with an average price return of better than 7%.1
Will the Street put its anxieties aside? Right now, you have a lot of uncertainty. Many analysts see a stock market unimpressed by tepid domestic growth and waiting fearfully for the other shoe to drop (meaning Greece).They see more pain ahead for U.S. investors. On the other hand, there is also talk of when a point of capitulation might be reached, i.e., is Wall Street simply ready to rally even in the face of the debt troubles in Europe and the slow recovery here.
You could argue that certain Wall Street psychologies (and tensions) aid 4Q rallies. After all, the pay of money managers relates to performance and there is renewed pressure on them to come through as the end of a year looms.
Could new optimism surface? Perhaps it is surfacing now. As the third quarter wrapped up, Reuters polled 350 stock market analysts worldwide. Their consensus forecast was that 18 of 19 major world stock indices would either advance or suffer insignificant losses in the fourth quarter (Taiwan’s TAIEX was the lone exception in the forecast).2
They also felt that two indices would achieve 2011 gains: South Korea’s Kospi, and the Dow Jones Industrial Average. They think the Dow will end 2011 up about 2%. The Dow was at -5.74% YTD at the closing bell on September 30.3,4
On a particularly bullish note, Bloomberg surveyed 12 Wall Street strategists in early October and found them collectively forecasting the greatest 4Q rally in 13 years. They think that the S&P 500 will rise 15% this quarter, which would mean a push to 1,300 by New Year’s Day.5
Stocks certainly are cheap. Bloomberg data also indicated that when the S&P nearly closed at bear market levels in early October, it was down to 12x reported earnings; valuations were lower than they had been at any point since 2009. At the end of September, the MSCI World Index was trading at just above 10x its 12-month forward earnings, well under its average of 14.3x earnings since 2001.2,5
Some analysts are optimistic about the coming quarters. Indeed, the 350 analysts surveyed by Reuters are envisioning some impressive bull runs. They think Russia’s RTSI will advance 32% between now and mid-2012; they feel Brazil’s Bovespa will rise approximately as much in the next three quarters. If you follow emerging markets, forecasts like these may not surprise you much. However, they also see double-digit advances for the Dow, Nikkei 225, All Ordinaries, CAC 40 and DAX by mid-2012.2
Historically, stocks have had impressive resilience. Here are two other encouraging statistics in the wake of the Dow and S&P’s double-digit third quarter drops:
• The Dow had 14 quarterly losses of 10% or more in the period from 1962-2009. In 79% of the ensuing quarters, the Dow pulled off a quarterly gain.
• The S&P suffered 11 quarterly losses of 10% or more during a stretch from 1981-2009. In 80% of the following quarters, it posted a quarterly gain.6
Another 4Q rally depends on many variables, but if Greece avoids default and 3Q earnings don’t disappoint, we might see a better end to 2011 than the bears anticipate.
Citations.1 - moneywatch.bnet.com/investing/blog/investment-insights/stocks-ready-for-fourth-quarter-rally/2833/ [10/3/11]
2 - reuters.com/article/2011/09/29/us-markets-stocks-poll-idUSTRE78S4EK20110929 [9/29/11]
3 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [10/7/11]
4 - cnbc.com/id/44729786 [9/30/11]
5 - bloomberg.com/news/2011-10-07/stock-index-futures-in-u-s-rally-after-employment-growth-beats-forecasts.html [10/7/11]
6 - cnbc.com/id/44677114/Third_Quarter_Pain_Fourth_Quarter_Gain [9/29/11]
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