Daily Archives: August 6, 2014

Heads Up!

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Meteorologists (and insurers) speak of the 1 in a 100 year flood. But what is happening in western economies (and Japan) is not even close to a 1 in a 100 year event. It has not happened in centuries; and, I would argue human civilization hasn’t experienced the sort of monetary conditions we now bear witness to. How and when it all ends, no honest person knows. But I strongly suspect that when it ends, it will end badly.

Here is what’s happening: Holland Interest rates are lower than any time in 500 years. That’s right -in 500 years, Dutch interest rates have never been lower. That history covers the Tudors, the Dutch 80 year War of Independence, 30 Year War (a war which claimed the lives of 25 to 40 per cent of all Germans and Bohemians), Tulip mania (and bust), three Anglo Dutch wars, the simultaneous South Sea & Mississippi bubbles, 7 Year War, empire building in the Dutch East Indies, American & French revolutions, Napoleon (when Dutch interest rates hit an all-time high), 19th century peace & prosperity, 20th century wars and Depression. Yet in our very own time, in 2014, Dutch interest rates have never been lower.

The “Heat Map”

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Most of the time the U.S. stock market looks to 3 factors (call them the “pillars” that support the stock market) to support its upward trend – let’s grade each of the pillars.

CONSUMER SPENDING: We have graded this factor B (above average) based upon the increase in retail sales as reported in recent economic reports.

THE FED AND ITS POLICIES: We continue to grade this factor an A+ (extremely favorable) because the FED cannot do much more than it is doing to support the stock market and asset prices. For a further discussion of two metrics that influence the Federal Reserve’s Monetary Policy, click here.

BUSINESS PROFITABILITY: We CONTINUE to rate this factor B- (slightly above average).Earnings results have mostly beaten expectations. With nearly half of the S&P 500 having reported, companies have eclipsed earnings expectations 76% of the time and exceeded sales expectations 67% of the time, according to FactSet. Companies are on track to grow earnings by about 6.7%, which would exceed expectations for 4.9% growth as of June 30.

The “Heat Map” is indicating the U.S. stock market is in good shape ASSUMING no international crisis. We have identified one potential international crisis hot spot:

Iraq and the “powder keg” in the Middle East including Gaza. On a scale of 1 to 10 with 10 being the highest level of crisis, I rate this Middle East powder keg situation as a 3 at this time. This is unchanged from last week even in light of the inability to find a diplomatic solution to the Israeli/Gaza conflict. Risks continue to lurk, and they deserve our ongoing attention.

NOTE: There is no change from the last report.

The Economy

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The big economic release of the week was US Gross Domestic Product rebounding to 4 percent growth in the second quarter, from a revised 2.1 percent contraction during the 1st quarter.  The increase reflected positive contributions from personal consumption expenditures, private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment.  Initial Jobless Claims continued the run of good data as benefits came in at 302,000 in the week ending July 26th.  Despite the decline in initial jobless claims, the US Unemployment Rate rose to 6.2 percent in July from 6.1 percent in June.  This confirms more folks are coming back into the jobs market attempting to obtain employment, which have previously been long term unemployed or underemployed.  Personal incomes rose .39 percent in June over the prior month thus extending consumer confidence.  This is a slew of positive economic releases which is supporting a snap back in economic activity from the first quarter.

The data released over the prior week in relation to Federal Reserve policy supports low rates for an extended period of time.  Inflation, tracked by the personal consumption expenditures price index, came in at 1.6 percent year over year and .2 percent month over month.  When weighing subdued inflationary pressures with an improving jobs market, the Fed believes they can keep rates low until they confirm greater labor participation and inflation.

Real Life Questions

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QUESTION: What does the code (for example, VNG00040199) appearing in the subject line of Valley National email’s mean?

ANSWER: It is a code system for our database to capture emails sent back and forth between VN advisors, staff, and clients. This permits us at VN to more easily review client activities in the future and coordinate our services to clients. We use the best software in the financial services industry from Tamarac – high-tech stuff.

The Numbers

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Last week, U.S. Stocks, Foreign Stocks and Bonds all decreased. During the last 12 months, STOCKS outperformed BONDS.

Returns through 8-1-2014

1-week

Y-T-D

1-Year

3-Years

5-Years

10-Years

Bonds- BarCap Aggregate Index

-.1

 3.9

  4.8

  3.0

  4.5

4.8

US Stocks-Standard & Poor’s 500

-2.7

 5.4

15.2

16.9

16.7

7.8

Foreign Stocks- MS EAFE Developed Countries

-2.1

  .1

10.1

 4.9

  6.1

4.1

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.

“Your Financial Choices”

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“Your Financial Choices” The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week, enjoy a pre-recorded show this week during Bethlehem’s Musikfest week.

WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area; and, it is broadcast on FM 93.7 in the Fogelsville and Macungie area – or listen to it online from anywhere on the internet.  For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.comand visit www.wdiy.org.

Personal Notes

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One of the reasons I have no plans to retire is I like helping people. I especially enjoy working with those retirement minded employees who need answers. And, with all the changes occurring at PPL, Air Products, Merck and other LV employers, I suspect there are many who need my help to answer the following:

  • Do I have enough to retire?
  • Can I retire and spend $10,000 per year for travel? Can I afford to buy a condo at the beach?
  • If I have to work part time after retirement, how much do I have to earn per week?
  • How do I replace my paycheck in retirement?
  • I can take my pension in lump sum or I can take a payout over my lifetime or joint with my spouse – which option is best?
  • I have savings and investment scattered around-how do I get money out of them to supplement my Social Security and pension?
  • When should I and my spouse start Social Security payments? Should I have income taxes withheld?
  • Are my investments properly allocated for retirement?
  • How can I reduce my income taxes during retirement?
  • What about health insurance- I used to simply sign up through work but now what do I do?
  • I may be able to perform some consulting work. How should I set myself up?
  • Are my Will and Power of Attorney up to date?
  • Do I still need life insurance? What should I do with my old life insurance policies?

Over the last 30 years I have helped so many that I have developed several powerful tools to answer these questions plus many more. For more information click: www.MyRetirementPro.com

Thomas M. Riddle
President, VNFA

The FED and Its Policies

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The FED cannot do much more than it is doing to support the stock market and asset prices. Two metrics that influence the Federal Reserve’s Monetary Policy are:

Employment: The Fed is looking for signs that the slack in the job market is declining. They are following the U6 “underemployment” rate or the level of people working part-time because they can’t find full-time work or are otherwise marginally attached to the labor force. The gap between the U3 (total unemployed) and the U6 (underemployed) suggests there is plenty of room for the labor markets to tighten up before there is a risk that rising wages will lead to inflation. The U3 and U6 unemployment measures are still higher than the peaks seen during previous recessions.

Inflation: The Consumer Price Index increased .30% in June over the prior month.  Year over year the inflation rate remained steady at 2.10%.  Two-thirds of the increase was primarily driven by the gasoline index.  However, since June, oil and gas prices have decreased which should lower inflation expectations and keep the Federal Reserve on the same easy monetary policy path.

The Markets This Week

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Strong economic news and mostly positive earnings reports couldn’t offset fears last week that the Federal Reserve finally has started to pull away the punch bowl, albeit very slowly. Stocks had their worst one-week drop since January, and the Dow Jones Industry Average toppled into negative territory for the year.

The Federal Reserve delivered a modestly more upbeat assessment of inflation, jobs, and the economy after its two-day meeting last week. Its assessment, combined with last week’s stronger-than-expected report on gross domestic product and news of 209,000 job gains in July, cemented the belief that the central bank will conclude its Treasury purchases in October and start raising rates in 2015 if the economy continues to improve.

“This is the beginning of a little taper tantrum,” says Diana Joseph, chief investment officer at Barrington Strategic Wealth Management. As the Fed’s easy money-policies reverse, people are forced to focus more on what they’re paying for investments. If last week is any indication, investors didn’t like what they saw in their portfolios.

The Dow fell 467.20 points this week, or 2.75%, to 16,493.37. The Standard & Poor’s 500 index dropped 53.19 points to 1925.15. The Nasdaq Composite index fell 96.92 points, or 2.18%, to 4352.64.

The S&P is down 3.16% from this year’s high of 1987.98 and the selloff could have more room to run. “My incoming calls from financial advisors are running 10-to-1 with most asking what they should buy, and that’s not good,” says Jeffrey Saut, chief investment strategist at Raymond James.

The calls indicate advisors are still optimistic and willing to buy the dips. “It feels to me like we’ve started a 10% to 12% correction,” says Saut, who has 25% of his portfolio in cash. But he’ll be more certain when he sees the market’s action next week.

Among the bigger losers in the Dow last week were shares of Exxon Mobil (XOM) and Chevron (CVX). Both fell by just over 4% despite strong earnings reports, as they disclosed they had experienced declines in production in the latest quarter. The price of crude fell during the week to $98 a barrel.

(Source: Barrons Online)