WHEN WILL GAS PRICES FALL?

Is there much we can do besides wait?

Could $5 gas arrive with summer? As of April 6, U.S. retail gasoline prices were up 20.15% YTD; on that date, AAA’s national survey had the price of regular unleaded averaging $3.94 per gallon. So what happens this spring and summer – traditionally when Americans tend to hit the road?1

A new Christian Science Monitor/TIPP survey of 900+ adults finds that the average American expects pump prices of around $4.75 a gallon come July. That’s about 20% above where prices are now.2

Is that perception cynical, or realistic? It depends on whether you think the latest price spike will eventually moderate according to the historical pattern.

Will the classic pattern hold? Short-term price jumps in retail gasoline are often partly tempered by lessening demand. That is, the price of gas climbs to a certain point where consumers simply decide to cut back on their driving. As demand drops, prices finally follow.

This could easily happen; it may happen soon. Yet when we look at the macro view, we have not been following the classic pattern. American consumer demand for gasoline has declined slightly in every year since 2007. (Before the recession, sales of big SUVs represented 20% of U.S. auto buying; now they account for 5% of it.) In fact, the federal government’s Energy Information Administration (EIA) believes that U.S. gasoline consumption will drop by another 7% over the next 25 years.3

Who is to blame for the soaring prices? The Christian Science Monitor/TIPP survey asked for opinions. Close to a quarter of those polled put the blame on the oil industry; about 20% pinned the blame on speculators in the commodities market. Coming in third and fourth: the Obama administration (14%) and Congress (9%).2

As the world is a global village, our gas prices are most influenced by the world oil market. Recently, the factor exerting the biggest influence has been the threat of supply disruption in the Middle East – but that’s not the only factor weighing on the market. We are using less oil and gasoline, but China and India and other emerging economies are using more – in fact, 10 million more cars hit the roads in China during 2010 alone.4

In addition, the U.S. has become a net gasoline exporter for the first time in more than five decades as a consequence of key oil refineries along the east coast and in the Caribbean ceasing production. Also, many of our refineries can now produce gasoline for less than it would cost at Latin American or European supply points.4

Basically, we are competing with the world for our gasoline – and the world oil market causes the big ripples in the equilibrium. This is why boycotting gas stations in your area for a day has little more than symbolic effect.

What could America do? The Obama administration could try some quick fixes, but some might not be popular. Releasing some of the inventory in the Strategic Petroleum Reserve could help – and in fact, announcing the release after the fact could potentially affect oil prices more than publicizing it beforehand.

To crimp speculators, the government could request that the New York Mercantile Exchange and Intercontinental Exchange (on which NYMEX crude and Brent crude get traded daily) boost margin requirements, a regulatory move which would discourage speculators from working with borrowed money. It could ask states to strictly enforce a more fuel-efficient, 55-mph speed limit on our nation’s highways, which would not please the trucking industry or the typical driver.

It seems every year we are tested by spikes in gas prices. As we transition (however gradually) from fossil fuels to other forms of energy, we may still have several of these episodes in our lifetimes.

Citations.
1 - money.msn.com/market-news/post.aspx?post=d8808e5a-07d2-477c-aa6e-0497b6d7402b [4/5/12]
2 – www.csmonitor.com/USA/Politics/2012/0406/Americans-spread-blame-for-high-gas-prices-foresee-4.75-a-gallon [4/6/12]
3 – www.npr.org/2012/03/22/149061105/whats-making-americans-less-hungry-for-gasoline [3/22/12]
4 – www.npr.org/blogs/thetwo-way/2012/03/23/149220383/why-gas-prices-are-rising-even-as-demand-is-down [3/23/12]

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.

WILL RENTING OUT FORECLOSURES HELP THE HOUSING MARKET?

Is this the initiative that could turn things around?

Another big idea – with a big opportunity attached. No magic wand will repair the sluggish housing market, yet the idea of converting foreclosed homes into rental properties has opened eyes – especially the eyes of private equity firms.

The federal government and major lenders are now putting that idea into action. Inventory abounds – between them, Fannie Mae and Freddie Mac are saddled with about 180,000 foreclosures, and the Federal Housing Administration has about 32,000 REOs. RealtyTrac says banks own more than 600,000 REOs by themselves.1,2

In Q4 2011, home ownership hit its lowest level (66%) in 14 years. The rental market is red-hot right now, and private equity firms see some amazing potential profits within their short-term reach.2

How catalytic could this effort become? Karl Case (yes, the Case in Case-Shiller), who co-created this proposal, thinks that “the seeds to a recovery are being planted” via this program. Accompanying visions of recovery, there is genuine excitement: a principal at a California private equity firm told Bloomberg that “this will be a new institutional asset class in the next 24 months.”2

Trial programs launch in April. As a first step, the Federal Housing Finance Agency (Fannie and Freddie’s parent) is auctioning off almost 2,500 downtrodden residential properties this month in eight metro areas. They will be offered to institutional investors in bulk (for example, 99 properties in Chicago and 572 properties in Atlanta) and investors must agree to rent them out for X number of years (the number has not been determined).3

In the private sector, Bank of America is launching a program this spring with a slightly different slant. It will give 1,000 homeowners in Arizona, Nevada and upstate New York a chance to stay in their homes as renters as the foreclosure process plays out. BofA plans to sell these REOs to investors within three months (or as soon as the occupants surrender ownership and start paying rent). Borrowers can’t apply for the program themselves, but they can alternately ask BofA to cancel their mortgages via a deed in lieu of foreclosure and then contractually agree to rent the same home for up to 36 months at or below market rates. This program could go national if it succeeds.4

Could the ROI go through the roof? One private equity firm thinks it can package its envisioned portfolio of converted foreclosures into a public REIT with an internal rate of return approximating 25% within three years. Reuters recently cited other institutional investors with more cautious visions of ROI of 8%-15% from their efforts. Still, that looks pretty rosy next to current yields from 10-year Treasuries and CDs. If the housing market perks up, perhaps it may prove true.1

What about the ethics of this? Not all economists think this is a great idea. Detractors ask: should hedge funds become landlords? Should homes owned by Fannie and Freddie be sold to institutional investors at deep discounts? Is this another example of the 1% benefiting from the misfortunes of the 99%?

Other proposals were up for consideration. Some of the ones not chosen by the federal government could be copied in the private sector. Dean Baker, co-director of the Center for Economic and Policy Research, pitched the idea that Fannie and Freddie could offer borrowers the chance to stay put in their foreclosed homes and pay market rent. Morgan Stanley lobbied for special loans to institutional investors and tax breaks on rental income.5

Is this the cure for the housing blues? These public and private foreclosure conversion programs boast intriguing potential: a possibility of sizable profit, and a chance to fight blight. A Morgan Stanley report notes that by 2016, circa 7.5 million homes with a present market value of $1 trillion will be liquidated via foreclosures and short sales. This could expand the total of rental homes in America from the current 20 million to 27.5 million. Morgan Stanley reminds investors that single-family homes operated as rentals have yielded annual returns averaging 8.1% since 1990.2

Citations.
1 www.reuters.com/article/2012/03/21/us-usa-foreclosures-investors-idUSBRE82J12M20120321 [3/21/12]
2 www.fa-mag.com/fa-news/9855-foreclosures-draw-private-equity-as-us-sells-homes.html [1/31/12]
3 money.cnn.com/2012/02/29/real_estate/Fannie_foreclosure_homes/index.htm [2/29/12]
4 articles.latimes.com/2012/mar/24/business/la-fi-home-rental-20120324 [3/24/12]
5 www.washingtonpost.com/blogs/ezra-klein/post/can-a-new-plan-to-rent-out-foreclosed-properties-actually-work/2011/08/10/gIQAO0YA7I_blog.html [8/10/11]

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.

HOW TO DIE LIKE A DOCTOR

Here's a painful, and sometimes funny, look at how key legislative decisions are made in Washington, D.C., which you are encouraged to share with your friends: http://www.ritholtz.com/blog/2012/03/how-lobbyists-run-washington/?utm_source=dlvr.it&utm_medium=twitter

If you want to fix the problem of rising costs in the U.S. healthcare system, or at least reduce the looming Medicare/Medicaid entitlement burden, there's a surprisingly easy solution. In Washington policy circles, it has been estimated that more than 80% of all the dollars spent on healthcare in the U.S. are incurred in the last nine days of a person's life. Many times, the money is spent keeping a person alive in a vegetative state, prolonging an incurable illness or painful conditions where there is little to no chance of recovery. The money is not just wasted; it may actually be used to prolong suffering when recovery is not an option.

It doesn't have to be this way. In an ongoing blog on the Forbes website (http://www.forbes.com/sites/carolynmcclanahan/2012/03/07/how-to-die-like-a-doctor/), emergency room physician and financial planner Carolyn McClanahan tells us that doctors are among the best at avoiding this dismal fate at the end of their lives, by taking a few simple precautions.

Dying like a doctor, she says, starts with understanding that we all get sick and die. Most people know this, but don't realize it deep-down, which is why individuals who experience near-death experiences--making death a more prominent part of their awareness--often choose to live more vital and productive lives thereafter, determined to make every second count. As McClanahan says: "when we live with no regrets, death isn't scary."

Doctors also see first-hand the situations where an unconscious person goes through a battery of procedures that keeps them alive until Friday when they otherwise would have died the previous Tuesday. McClanahan recommends that laypersons get a closer look at the transition from life to death by volunteering at your local hospice.

Finally, doctors understand the power of documentation. They make sure they have a living will that describes how they want to be treated when faced with a serious accident or illness. They'll have an advance directive which provides written instructions regarding their medical care preferences.

In an earlier blog post (http://www.forbes.com/sites/carolynmcclanahan/2012/03/02/doctors-do-die-differently-how-we-make-certain/), McClanahan says that it is best to focus on outcome rather than actions. Her favorite example is the routine question: "Do you want CPR?"--which, she says, seldom works at the end of life, will crush the bones in your chest and will become just another charge on the "superbill" the hospital sends the insurance company after your death. If, instead, you turn the question around, and make it: what type of lifestyle is acceptable to you?--then you might answer: "as long as I can use my brain, even if I can't move, I want to be kept going." That means you would be okay being a quadriplegic, but don't want to be kept alive in a persistent vegetative state.

Both of these documents will be entrusted to members of the family, or placed in a safe place that is accessible to your loved ones. They'll go alongside a medical power of attorney, which empowers a friend or relative to make financial decisions when you are unable to. Doctors also know to designate a health care agent who understands their wishes and will act accordingly when the hospital medical team presses for permission to keep them alive when there is little chance of recovery.

McClanahan tells the story of her own father, who was diagnosed with lung cancer. The doctors recommended chemotherapy and radiation. When he decided to forego this painful treatment, the doctors were indignant, and predicted he would be dead within six months. He lived three more years, and the hospice was a blessing at the end. He was one of the few non-physician Americans who had the knowledge and the documentation to die with dignity.

Like a doctor.

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.

'CLIENT-LAST' ADVICE

In professional circles, we often talk about a "client-first" attitude, which is shorthand for giving your clients the same quality of financial advice as you would give your mother. It's a useful shorthand way to navigate through a financial world that is still beset by incentive payments, expensive rewards for sales production, under-the-table or soft dollar incentives and a host of other ways that product vendors try to buy their way into your portfolios.

"Client-first" simply means that the client's financial success and well-being comes before all other considerations. It's what you would expect from a doctor or other professional, and many of us believe that you have a right to expect the same level of care from your financial advisor.

Most professional advisors think this is all a bunch of baloney. Wall Street firms and sales organizations are very good at hiding the real agenda behind their advice, and do a masterful job of hiding the profits they skim off the top when you take their recommendations. This is why it was so startling when, in a New York Times opinion piece, Goldman Sachs executive director Greg Smith essentially pulled the curtains back and showed how Wall Street really works.

Smith declared that he was resigning from the venerable brokerage firm--perhaps Wall Street's most highly-respected organization--because, in his view, its culture is all about putting the client's interests last. "To put the problem in the simplest terms," he writes, "the interests of the client continue to be sidelined in the way the firm operates and thinks about making money."

Pulling the curtain aside a bit further, he said that the criteria for promotion and success was not "leadership" or "doing the right thing." Instead, he said, "if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence."

How do you make money for the firm? Smith outlined three ways. A Goldman broker or executive can rise in the ranks by "persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit." (Just what you want to buy for your retirement portfolio, right?) Or, alternatively, "get your clients--some of whom are sophisticated, and some of whom aren't--to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned," said Smith, "but I don't like selling my clients a product that is wrong for them."

Pulling the curtain back still farther, Smith said that "It makes me ill how callously people talk about ripping their clients off. Over the last 12 months, I have seen five different managing directors refer to their own clients as 'muppets,' sometimes over internal e-mail... Will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client's goals? Absolutely. Every day, in fact."

He said that the most common question he gets from junior analysts about derivative investments is: "How much money did we make off the client?" He wonders what the effect will be on that junior analyst who sits in the meeting rooms hearing senior executives talk about "muppets," "ripping eyeballs out," and "getting paid."

You can read Mr. Smith's comments in their entirety here: http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?_r=2&hp, where you will also see a nice illustration of vultures at feast. He predicts that companies--and people--who care only about making money will not be able to keep the trust of their customers.

But is this true? Chances are, most people reading this eye-opening article will be hearing about these things for the first time, and may not believe it's true about THEIR broker. Millions of people routinely trust their brokers and the big firms that buy Super Bowl advertisements, never seeing this messy view on the other side of the curtain, unknowingly chipping in their retirement dollars to the outsized Wall Street bonus pools.

You find yourself wondering: who's going to tell those "muppets"--your hard-working friends and neighbors--that their broker is quietly, invisibly, cleverly putting their interests last?

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.

THE LAST GREEK HEADLINE?

Most of us have heard way too much about the finances of a relatively small member of the global economy: Greece, and its debt crisis. Recently one economist described the Greek debt default as "the slowest-moving train wreck in history."

But now, the constant parade of headlines may be over. On Friday, March 9, holders of more than 83% of Greece's government bonds agreed to exchange their nearly-worthless holdings for new bonds. In effect, they have forgiven 74% of the bonds' value--wiping out roughly $138 billion off of Greece's debt burden--a number that could rise as a series of "collective action clauses" force the remaining 25% to go along with the deal. The swap agreement also opens the door for the other European finance ministers to approve a $173 billion bailout package for the ailing Greek economy.

Of course, even with the debt forgiveness and bailout package, Greece is far from out of the woods. An article published by the British Broadcasting Corp. (BBC) reports that the country still plans dramatic government spending cuts, which is deepening an already-severe recession that saw a 7.5% reduction in Greece's GDP in the final three months of 2011. But the risk that Greece's problems will metastasize into a global financial meltdown seems to be greatly diminished.

One of the most interesting, and unreported, aspects to the crisis was the underlying fear that that European banks were secretly holding massive levels of credit default swap exposure on their books, many of them specifically written to insure losses on Greek bonds. Derivatives contracts similar to these, written on collateralized home mortgage bonds, were so prevalent in the 2008 market meltdown that, when counterparties started making claims, it brought the global financial community to its knees. For inexplicable reasons, banks and financial institutions are not required to report their exposure to these contracts, so until Friday, nobody knew which lender might be on the hook for more than their institution was worth.

When the International Swaps and Derivatives Association, after a brief conference, decided to classify the deal as a "credit event," European regulatory authorities held their breath. When the Moody's rating agency declared that, by its definitions, Greece had defaulted, it cemented a contract-holder's claim to be repaid in full. (Standard & Poor's followed suit a day later.) But when the claims were presented, it became apparent that the derivatives payouts could be as low as $3.2 billion, a tiny fraction of the losses that banks incurred on their Greek bonds. Instead of an earthquake, the derivative swaps triggered a loud popping sound.

Which is perhaps the last sound you'll hear about Greece and its reckless borrowing binge.

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

sources: http://www.bbc.co.uk/news/business-17308804

http://www.washingtonpost.com/business/markets/asian-stock-markets-rise-as-chinas-inflation-eases-greek-debt-deal-nears-completion/2012/03/08/gIQAN0BH0R_story.html

http://www.cnbc.com/id/46702123

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.

CHINA, ITS CURRENCY & THE GLOBAL ECONOMY

Which move will it make to address pressing issues?

Right now, there are dozens of mutual funds and ETFs devoted explicitly to investing in China’s impressive emerging market. Even with the risk of asset bubbles, the promise of China is simply too tantalizing to ignore for many.

The question is whether its economy can maintain its powerful momentum in 2012. If not, the impact on global investors could be significant.

Is China headed for a soft landing… or a hard one? Recent data out of the PRC has given economists pause. China’s official manufacturing index fell to 49.0 last November, indicating sector contraction; since then, it has barely crept above 50 (51.0 in February, 50.5 in January). Its red-hot GDP cooled slightly to 8.9% in Q4 2011 following a series of interest rate hikes by the People’s Bank of China to try and rein in inflation. Still, consumer prices are on the rise in China – the inflation rate rose 0.4% in January to 4.5%.1

Other troubling signs emerged in January: a 23.8% monthly drop in auto sales, a fifth consecutive monthly dip in property prices, a third straight monthly decrease in foreign direct investment, and month-over-month declines in exports and imports.2

While China has one of the best debt-to-GDP ratios in the world – 16.3% at the end of 2011 – that ratio may reflect the “official story” rather than the reality of its “hidden liabilities”.3

What if the yuan appreciates? Until recently, this was the trend. The People’s Bank of China elected to loosen the yuan from the dollar about two years ago, and the currency now “floats” within a narrow band. In February the yuan reached an all-time high versus the U.S. dollar (6.3287). The PBC projects about 3% appreciation for the currency in 2012.4

An even stronger yuan would alter the exchange rate between China and the U.S. and theoretically lessen American consumer demand for Chinese imports. If the yuan continues to appreciate against the dollar, there may be three macroeconomic effects. One, American firms would have to pay more for Chinese goods they buy. Two, American companies might try to source out new suppliers and cheaper factories in nations like India, Thailand and the Philippines – or they might even direct some dollars back into our own manufacturing sector. None of this can be done overnight, so in this scenario our trade balance with China could worsen before showing any long-run improvement.

A fast-appreciating yuan would mean more purchasing power for the rising Chinese middle class, less emphasis on exports in China’s economy, and some deflation – and a little price deflation might be welcomed by China’s citizenry. However, a gradually appreciating yuan (on the level of 2-3% annually) might amount to the best-case scenario for the global economy and investors.

What if the yuan depreciates? China is poised for political change in late 2012 - a Communist Party congress will occur and Vice President Xi Jinping is in line to become the nation’s new leader. Will the new administration elect to reverse any yuan appreciation? 2

For some time, China has bought dollars in the forex markets to keep the yuan undervalued, and that has served as a tonic to its export-driven economy. A weak yuan policy (and low labor costs) also helped to encourage direct foreign investment in China. Weakening the yuan again would drive up the cost of imports for the Chinese consumer, and China would be prompted to boost exports anew – implying more economic growth, less unemployment and renewed price advantage in global markets – in other words, an antidote to a slowdown.4

The cloudy near-term future of the yuan makes investing in China something of a wild card. While some economists think a stronger yuan would be good for the world economy in the long run, the fear of a hard landing (and its impact not only on the Chinese economy but the world economy) may prompt the nation’s leaders to move in a different direction.

Chinese government researchers have told Reuters that the PRC has set a target of 7.5% growth for 2012; the PRC usually sets GDP targets it can comfortably meet, so results might exceed projections. Even so, growth might not approach the 9.2% GDP China saw in 2011. In February, Standard & Poor’s gave China a 10% chance of a hard landing in 2012 (5% GDP) and a 25% chance of a “medium landing” (7% GDP).2,5

Which way in? If you are thinking about investing in China, keep in mind that its economy has a relatively high inflation rate. This may encourage Chinese companies to overstate or overestimate factors like sales growth, operating margins, debt-to-asset ratios and fixed asset turnover. So while an individual investor may at first be enticed by a large-cap international Chinese company, he or she may opt for an ETF or index fund after further consideration. Quite a few stock market analysts think these vehicles provide sensible entry into China for the small investor.

Citations.
1 - www.chinadaily.com.cn/china/2012-03/02/content_14735838.htm [3/2/12]
2 – www.forbes.com/sites/gordonchang/2012/02/20/rearranging-the-deck-chairs-on-the-ss-chinese-economy/ [2/20/12]
3 – www.forbes.com/sites/gordonchang/2012/02/26/how-will-china-pay-off-its-debt/ [2/26/12]
4 – www.cnbc.com/id/45788856/Yuan_at_Record_High_vs_Dollar_On_Track_for_4_Gain_in_2011 [2/9/12]
5 – www.nasdaq.com/article/sp-sees-china-soft-landing-as-most-likely-scenario-20120202-00090 [3/2/12]

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.

OBAMA'S PROPOSED 2013 BUDGET & THE TAXPAYER

How does the President want to modify tax rates?

The wealthiest taxpayers could be hit hard if the tax hikes in President Obama's 2013federal budget proposal become law. The good news is that the tax changes outlined by the President in mid-February may be softened by eventual bipartisan compromise. As currently proposed, they would impact the wealthiest Americans on several fronts.

The Bush-era tax cuts could expire for the rich. As envisioned, the top tax rate would reset to 39.6% for individuals earning more than $200,000 a year and couples earning more than $250,000 a year. The EGTRRA/JGTRRA cuts would be extended for the vast majority of taxpayers.1

A new kind of AMT could emerge. President Obama would like to see a "Buffett rule", basically a simplified take on the Alternative Minimum Tax. This new rule (inspired by Warren Buffett's now-famous New York Times editorial) would impose a 30% income tax floor for anyone earning more than $1 million a year. Yet while President Obama has mentioned this idea in speeches, the proposed 2013 budget contains no details of it. The White House says that the President would prefer to get to the details after broader revisions to the tax code. Even then, a "Buffett rule" might be hard to implement in practice.1,2

Tax rates on capital gains & dividends would rise. Long-term capital gains would be taxed at 20% instead of 15%. Dividends amassed by businesses and taxpayers in the highest income tax bracket would be taxed as ordinary income, at 39.6%.1

Investment income could be reduced by a healthcare surtax. As a condition of the Health Care & Education Reconciliation Act of 2010, the highest-earning U.S. households would be hit with a new 3.8% Medicare tax on unearned income in 2013.1

This levy would only affect taxpayers who realize huge amounts of investment income; gains exceeding $250,000 for an individual or $500,000 for a married couple. (The Tax Foundation estimates it would affect 2% of U.S. households.) For these taxpayers, dividends would effectively be taxed at 43.4%. The tax would also apply to income derived from real estate investment.1

Deductions would be decreased. The President's 2013 budget would cap deductions of qualified expenses at 28% for those in the top two income brackets. Right now, these taxpayers can deduct 33% and 35% of qualified expenses. Non-profits, the real estate industry and state and local governments seem likely to disfavor the cap.1

Estate taxes would rise. In 2012, we have a 35% federal estate tax with a $5.12 million individual exemption. The proposed 2013 federal budget would put the estate tax at 45% with a $3.5 million individual exemption.1

Other tax proposals. The envisioned 2013 federal budget would also:

• Make the $2,500 American Opportunity Tax Credit permanent
• Make the R&E credit for businesses permanent
• Authorize gradual increases in estate and gift taxes and revise rules for taxing different forms of trusts
• Offer a tax credit to employers expanding payrolls in 2012 (of up to 10% of the increase in wages subject to payroll taxes)
• Carry the bonus depreciation extension (on new equipment) for businesses through 2012
• Hike taxes on global corporations headquartered in the U.S. across the next ten years through less lenient foreign tax credits and restrictions on opportunities to defer taxes on foreign profits
• Recoup costs from the 2008 Wall Street bailout through fees charged to financial institutions holding more than $50 billion in assets
• Cut assorted tax breaks for energy companies3

How much of this budget draft will make it through Congress? Good question. Much of what the President is proposing may not be realized, but with the federal government badly needing to reduce its deficit, many of these changes could end up taking effect. Taxpayers and their advisors will want to keep their eyes on Washington.

Citations.
1 - money.msn.com/tax-tips/post.aspx?post=4bb02697-fe82-4c9a-ad0f-a164f50ce7c8 [2/17/12]
2 - www.nytimes.com/2012/02/17/us/politics/white-house-sees-buffett-tax-rule-more-as-a-guide.html [2/17/12]
3 - www.kansascity.com/2012/02/13/3426281/obamas-proposed-tax-hikes-at-odds.html [2/13/12]

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.