“Success is often the result of taking a misstep in the right direction.”
Al Bernstein
Motivational Quote of the Week
Monthly Archives: January 2012
Real-Life Situations
Questions: My Net Worth is in excess of $1,400,000 and my wife and I own most of our property in joint name. I understand the estate tax law permits us to transfer up to $5 million when we both pass away. Does this mean I do not have anything to worry about?
Answer:
Yes and No. Current estate tax law permits each individual to pass $5 million to his or her heirs at death ESTATE TAX FREE. But, the exemption goes back to $1 million in 2013. It is anyone’s guess as to whether this law will be changed (again) by 2013.
There are several opportunities in the new estate tax law provisions to plan for 2013 no matter what Congress decides. It is important that we review these provisions with you.
Feel free to contact me if you or someone you know has this type of situation. Financial Planning advice presented here is general in nature, and individual circumstances make applying these general rules tricky; thus, the above answer cannot be applied to all circumstances because the slightest variation could cause a different outcome.
“Your Financial Choices” on WDIY 88.1 FM
Hosted by Valley National’s Laurie Siebert, CPA, CFP, “Your Financial Choices” airs every Wednesday from 6-7 PM on WDIY 88.1 FM. Click below for information on this week’s episode!
Personal Notes
My boyhood home in the wilds of Western PA lies a few miles from Punxsutawney- a place that draws the media’s attention one day each year – this Thursday, on February 2nd.
The Meaning of Groundhog Day
Punxsutawney Phil, the “seer of seers and prognosticator of prognosticators,” is a groundhog resident of Punxsutawney, Pennsylvania, USA. On February 2, (Groundhog Day) of each year, the town of Punxsutawney celebrates the beloved groundhog with a festive atmosphere of music and food. During the ceremony, which begins well before the winter sunrise, Phil emerges from his temporary home on Gobbler’s Knob, located in a rural area about 2 miles east of town. According to the tradition, if Phil sees his shadow and returns to his hole, the United States will have six more weeks of winter. If Phil does not see his shadow, spring will arrive early. The date of Phil’s prognostication is known as Groundhog Day in the United States and Canada.
The Economy
Last week the number of POSITIVE developments exceeded NEGATIVE
developments -barely.
developments -barely.
Below is a succinct list of last week’s events:
Positives:
1) Italian and Spanish bond yields continue lower, 10 yr in Italy below 6%, Spain’s below 5%
2) German IFO business confidence rises to 8 month high
3) German consumer confidence at best since April
4) Euro zone mfr’g and services composite index unexpectedly moves back above 50, led by Germany
5) US Durable Goods orders in Dec surprise to upside but how much was pulled forward from 2012 due to 12/31 expiration of full depreciation expensing?
6) Jan UoM confidence rises to best since Feb ’11
7) Richmond and KC mfr’g survey’s both rise
8) Bank of Thailand cuts rates.
9) Reserve Bank of India cuts reserve requirements
Negatives:
1)Portuguese yields spike, 5 yr CDS up 150 bps on week to new high
2) Spanish unemployment for Q4 rises to 22.9%
3) Italian consumer confidence holds at lowest since at least ’96 when survey began
4) Q4 US GDP rises 2.8%, a touch below expectations but nominal GDP gains just 3.2%, the weakest since Q3 ’09. If deflator was in line with expectations, Real GDP would have been up just 1.3%. Real final sales up just .8% vs 3.2% in Q3
5) Initial Jobless Claims normalize at 377k after holiday distorted 356k last week
6) Inflation expectations within UoM rise to 3.3%, the most since Sept and remains above the 20 yr avg of 3.0%. Expectations also rise to multi month highs in TIPS market
7) New Home Sales remain anemic, prices fall 12.8% y/o/y
8) FOMC stretches out zero rates until late 2014, US$ resumes downward trend against everything. Fed destroying the price mechanism as if interest rates are artificially priced, what are assets really worth? If we don’t know what assets are really worth, how can capital be efficiently allocated? And, if Zero Interest Rate Policy was effective, Japan’s economy would have boomed over the past 10 yrs.
The Markets This Week
The major U.S. indexes finished mixed, but little changed last week, unable to hang on to gains that came Wednesday after the Fed said U.S. interest rates would remain low into 2014.
Instead, the January rally was slowed by soft economic results, and fourth-quarter earnings reports that were—apart from Apple’s (ticker: AAPL) spectacular results—lackluster. Slowing corporate-revenue growth may also be rearing its head.
Some price support may have come from an increasing sense that negative euro-zone events, which pummeled U.S. shares last year, are losing the power to destabilize stocks here.
The Dow Jones Industrial Average fell 60 points, to end the week at 12,660.46, off 0.47%, ending a three-week win streak. The Nasdaq Composite managed to add 29.85 points, or 1%, ending at 2816.55.
This year so far, the U.S. market seems to be doing a lot better job of “taking shots from Europe,” says Ryan Larson, head of trading at RBC Global Asset Management. The economic data were mixed and earnings muted. “The U.S. market is finding its own legs now, so it will be important to see if we can continue” to ignore Europe.
Barry Knapp, chief equity strategist at Barclays Capital, concurs. “The European Central Bank has done enough for now to stop the low-level run on the European banking system. There’s been a mitigation of the contagion risk.”
The proof, he adds, comes in various measures of market risk, which have returned to more normal levels. For example, during the August to November market maelstrom, the correlation among stocks was high at 0.9, meaning most stocks were moving in unison, either up or down. Now, that correlation is 0.15, he says.
Meanwhile, the fourth-quarter earnings season is “weak, once you take out Apple,” Knapp avers. Profit margins are coming under pressure in some sectors, particularly consumer-related, and global growth is falling to U.S. levels. And gross-domestic-product growth came in under forecast.
These headwinds aren’t enough to justify a sharp selloff, but a near-term correction is possible, he says, as investors realize that the U.S. economy is only bouncing back to trend, rather than improving; Apple distorts the numbers and it’s almost “its own asset class,” Knapp adds.
Apple said on Tuesday that continued strong demand for its products boosted sales by over 70%, to $46.3 billion, in its first fiscal quarter, ended Dec. 31, 2011. Earnings were $13.06 billion, up from $6 billion in the year-earlier period.
For once, the economic news last week was mixed, breaking a stretch of mostly expansive data. In particular, the U.S. fourth-quarter GDP figure released Friday was somewhat weaker than expected, at 2.8%, versus the 3% forecast. More importantly, the number was less impressive than it looks, as most of the growth came from inventory-building, which contributed 1.9% of the expansion.
With more than 180 of the companies in the S&P 500 index reporting, there have been 1.81 fourth-quarter positive profit surprises for each disappointing report, according to Zacks’ chief investment strategist, Dirk van Dijk. A more normal ratio is 3:1—so corporate profit growth is indeed slipping. Additionally, revenue growth is tracking lower, an aggregate 6% rise seen so far, down from 9% in the third quarter (Source: Barrons Online).
The Numbers
Last week, U.S. Stocks, Foreign Stocks and Bonds all increased. During the last 12 months, BONDS outperformed STOCKS.
|
Returns |
1-week |
Y-T-D |
1-Year |
3-Years |
5-Years |
10-Years |
|
Bonds- |
|
|
|
|
|
|
|
US |
|
|
|
18.9 |
|
|
|
Foreign |
|
|
-12.8 |
|
-6.3 |
|
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
ACTION PLAN (REPEATED FROM PRIOR COMMENTARY) HOWEVER SCENARIO ONE IS UPDATED
The future holds many possible scenarios for the European crisis. At the time of this writing on Sunday evening, the Greek government bond holders have failed to agree to terms to avoid an outright Greek default. It is very difficult to predict the actions of European central bankers and politicians. Thus, I believe we should consider each of the following scenarios as equally likely:
SCENARIO ONE: Because of insufficient action on the part of the Germans and the European Central Bank (the “ECB”), either the Greek government defaults OR the Italian Government bond rates go higher and higher, making it impossible for Italian Government to honor 100% of its debts (repeat of the Greece story). This would be a big event. Probably, the majority of Italian banks would face failure. And, several of the large French banks would also. In a matter of days or weeks, the stock markets would spiral downward. Pressure would build again on the banking system; thus, creating a situation similar to the Lehman Brothers bankruptcy in September 2008. Our stock market could drop substantially under this scenario.
SCENARIO TWO: The efforts initiated by worldwide central banks on November 30th and the subsequent announcement of a closer fiscal union are just the first two moves in a series whose end result is to build a lasting solution to the festering problem in Europe. Germany MUST play a big part in this scenario by placing its impressive cash reserves on the line. If Germany makes a clear commitment soon to do this, the U.S. stock market will be poised to propel stocks to a much higher level
So, how do you invest in this time of high uncertainty? I recommend the following, depending upon which category fits your unique circumstance:
1. Aggressive investors, moderately aggressive investors, and investors who do not intend to touch their investments for 10 years or longer – invest (now) one-half of the money you had “parked” on the side-lines. Invest the other one-half gradually over the next 6 months as you continue to gather more information, and carefully watch to see if Scenario Two unfolds.
2. Investors who need to withdraw from the investment portfolio – continue to “park” any amounts you expect to withdraw within the next 5 years in a short/intermediate term bond fund.
3. Conservative, moderately conservative, preservation minded investors and investors who with start withdrawing from their portfolio in 5 to 10 years– gradually invest the money you had parked on the side-lines over the next 6 months as you continue to gather more information, and carefully watch to see if Scenario Two unfolds.
Motivational Quote of the Week
“There is no future in the past, so make the future and live the present.”
Author Unknown
Real-Life Situations
Question: My granddaughter, age 21, is graduating from
college this spring and will start to work shortly thereafter. What would
be a great gift for her?
Answer: Consider putting money into a Roth IRA in her
name. The maximum is $5,000. The money, if untouched until age 66,
could be worth $105,000 at an average 7% rate of return. Alternatively, she
could withdraw the money in 5 years without penalty to purchase her first home.
(Disclosure: the rate of return is
for illustrative purposes only. Past performance is no guaranty of future
results.)
Feel free to contact me if you or someone you know has this type of
situation. Financial Planning and tax planning advice presented here is
general in nature, and individual circumstances make applying these general rules
tricky; thus, the above answer cannot be applied to all circumstances because
the slightest variation could cause a different outcome.