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Market Commentary - Week of 9/8/14

The Markets

It’s déjà vu all over again!

Last year, pundits and analysts tried to discern when the Federal Reserve might begin to end quantitative easing by reading economic tea leaves. For months, bad economic news proved to be good news for stock markets. This year, investors are seeking signs which might indicate when the Fed will begin to raise interest rates and, once again, bad news has become good news. Last week’s weaker-than-expected unemployment report helped push U.S. stock markets higher, according to Reuters, because it was interpreted to mean the Fed would not raise rates soon.

The week before, the Commerce Department announced household spending slowed during July. Consumer spending was up just 3.2 percent annualized through mid-summer which is the smallest increase in spending in five years. As it turns out, spending fell because Americans are saving more. During July, households set aside 5.7 percent of income, on average. While that’s good news with respect to American households’ financial security, it’s not such good news for U.S. gross domestic product, according to Barron’s:

“Unfortunately for the U.S. economy, a penny saved is not a penny earned. While the decision by Americans to cut back on their profligate ways isn't necessarily a bad thing – it was spending beyond our means that helped spur the Great Recession in the first place – it's only consumer spending, not saving, that counts when computing gross domestic product. So when consumers spent less in July than they did in June, it caused economists to ratchet down their third-quarter economic-growth forecasts which now sit below 3 percent.”

Some experts say slower growth is good news because economic expansion may last longer. While that’s all well and good, Robert Shiller, Sterling Professor of Economics at Yale, suggested in The New York Times that U.S. stock markets are looking a little pricey by some measures. He suspects the reason investors remain interested in buying highly-priced shares may ultimately be found, “…in the realm of sociology and social psychology – in phenomena like irrational exuberance, which, eventually, has always faded before.”

Data as of 9/5/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    0.2%    8.6%    21.3%    19.9%    14.4%    6.0%
10-year Treasury Note (Yield Only)    2.5    NA    3.0    2.0    3.5    4.3
Gold (per ounce)    -1.5    5.4    -8.6    -12.6    5.0    12.2
Bloomberg Commodity Index    -1.4    -0.7    -3.8    -8.2    -0.1    -1.3
DJ Equity All REIT Total Return Index    1.0    21.3    26.8    16.9    19.2    9.0
S&P 500, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

IF YOU LIVE IN THE UNITED STATES, NO MATTER WHERE YOU RESIDE, you are NOT in the top 10 when it comes to the world’s most ‘livable’ cities. The Economist Intelligence Unit’s Global Liveability Ranking and Report was published in August 2014. It relies on 30 factors such as safety, healthcare, educational resources, infrastructure, and environment to determine which of 140 cities around the world are the most livable. The burgs which top the rankings tend to be “mid-sized cities in wealthier countries with relatively low population density.” They include:

1. Melbourne, Australia 
2. Vienna, Austria
3. Vancouver, Canada
4. Toronto, Canada
5. Adelaide, Australia
6. Calgary, Canada
7. Sydney, Australia
8. Helsinki, Finland
9. Perth, Australia
10. Auckland, New Zealand

The names on that list haven’t changed since 2011; however, the average global livability rating has fallen 0.7 percent since 2009. The change is due to a decline in stability and safety (down 1.3 percent) among other things. More than 50 of the cities surveyed have seen their ratings move lower during the past five years. This year, the cities that ranked worst for livability included Damascus, Syria; Dhaka, Bangladesh; Port Moresby, Papua New Guinea; Lagos, Nigeria; and Karachi, Pakistan.

The good news for Americans is Washington D.C., Los Angeles, and New York City remain relatively highly ranked and haven’t experienced any change in their livability rankings. None of these is the most livable city in the United States, though. The top honor, here at home, goes to Honolulu (26th) followed by Pittsburgh (30th).

Weekly Focus – Think About It

“If you want your children to turn out well, spend twice as much time with them, and half as much money.” 
--Abigail Van Buren, American advice columnist

New 2015 IRA Rollover Rules

Avoid the penalties and stay up‐to‐date on the new IRA rollover rules for 2015:

http://money.usnews.com/money/personal-finance/mutual-funds/articles/201...

Market Commentary - Week of 9/1/14

The Markets

There is no substitute for mental preparedness. Just ask any professional athlete or Navy SEAL. One essential aspect of metal preparation is situational awareness – being able to identify, process, and understand what is happening around you at any given time.

That’s been a challenge for bond investors this year. 2014’s Treasury market rally took economists (and everyone else) by surprise:

“Treasury yields lurched higher in May 2013, when the Fed first sketched out a timetable to wind down its bond-buying program, even though it didn't actually begin the winding down until seven months later. Yields were expected to keep rising this year as that program ended and the Fed turned its attention to raising its short-term policy rate but, instead, yields have fallen as investors still seem enamored of bonds.”

A Bloomberg survey (August 8-13) found economists’ median forecast projected 10-year Treasury yields would be 2.7 percent by the end of September. The yield on 10-year U.S. Treasuries finished last week at 2.34 percent.

It’s likely bond market surprises may continue during the next few months. In fact, bond investors may want to mentally prepare themselves for a rough and bumpy ride. It’s likely analysts and investors will try to anticipate the Federal Reserve plans for increasing interest rates, and it’s not all that hard to imagine the type of volatility that could ensue. All you have to do is think back to the ups and downs that punctuated guesses about when the Fed might begin to end its bond-buying program. 

Barron’s offered the opinion the first rate hike won’t happen until March of 2015, but that won’t stop anyone from speculating it could happen earlier. Conjecture, rumor, and supposition are likely to begin before the Federal Open Market Committee meeting on September 16, 2014.

No matter how markets twist during the next few months, investors should keep their wits about them. Being mentally prepared may help.

Data as of 8/29/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    0.8%    8.4%    22.3%    18.3%    14.4%    6.2%
10-year Treasury Note (Yield Only)    2.3    NA    2.8    2.3    3.5    4.2
Gold (per ounce)    0.7    7.0    -8.7    -11.0    6.1    12.2
Bloomberg Commodity Index    0.9    0.7    -3.8    -7.8    0.1    -1.2
DJ Equity All REIT Total Return Index    0.4    20.1    23.2    15.3    18.7    9.2
S&P 500, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

LIFE EXPECTANCY HAS BEEN INCREASING BY 15 MINUTES EVERY HOUR for the last 50 years or so in the richer countries around the world, according to The Economist. That’s an increase of about 2.5 years per decade.

Longer lifespans are a mixed blessing. On the one hand, people may enjoy longer lives. On the other, the longer people live, the greater the chance that longevity risk – the possibility that life expectancy will exceed expectations – could negatively affect people, companies, and governments around the world.

One way to measure longevity risk is by estimating the cost of an aging society. The International Monetary Fund’s (IMF) 2012 Global Financial Stability Report calculated the potential cost of providing everyone in the world, age 65 and older, with the average income necessary to maintain his or her standard of living at its preretirement level. By 2050, assuming a replacement rate of 60 percent of preretirement income, the cost would be about 11.1 percent of gross domestic product (GDP) in developed economies and 5.9 percent of GDP in emerging economies – and that doesn’t include increases in health and long-term care costs. If longevity increases by three years, the estimated costs go up by almost 50 percent!

Insurance companies, employers with defined benefit (DB) pension plans, and governments are exposed to significant longevity risk. Insurers offer products designed to provide lifetime income. Employer-sponsored DB plans promise lifetime payments to employees who meet specific criteria. Governments with pension programs have made similar promises to citizens.

Many entities are looking for ways to effectively reduce their exposure to longevity risk. One way to manage longevity risk is to share it. An example would be to develop a “liquid longevity risk transfer market” where,

“…The “supply” of longevity risk would meet “demand” for that risk. That is, the risk would be transferred from those who hold it, including individuals, governments, and private providers of retirement income, to (re-) insurers, capital market participants, and private companies that might benefit from unexpected increases in longevity (providers of long-term care and healthcare, for example). In theory, the price of longevity risk would adjust to a level at which the risk would be optimally spread through market transactions.” 

The overall longevity risk market could be sizeable. According to Risk.net, current global annuity and pension-related longevity risk exposure is between $15 trillion and $25 trillion.

Weekly Focus – Think About It

“Some cause happiness wherever they go; others whenever they go.”
--Oscar Wilde, Irish writer and poet

Market Commentary - Week of 8/25/14

The Markets

What do Harry S. Truman and Hindu goddesses have in common? Both were invoked to describe Federal Reserve Chairwoman Janet Yellen’s speech at the Jackson Hole Economic Policy Symposium last week.

In her opening comments, Yellen confirmed the economy had improved and suggested more data was needed before the Fed could determine its path. She said:

“…our understanding of labor market developments and their potential implications for inflation will remain far from perfect. As a consequence, monetary policy ultimately must be conducted in a pragmatic manner that relies not on any particular indicator or model, but instead reflects an ongoing assessment of a wide range of information in the context of our ever-evolving understanding of the economy.”

Afterward, some Wall Street professionals empathized with Truman, the 33rd President of the United States and a native of the ‘Show Me’ state, who once lamented the lack of resolute economic advice available. Truman pined for a ‘one-handed economist’ who wouldn’t hedge by saying, “On the one hand… on the other hand…”

Barron’s reported on the speech saying, “In discussing the labor market… Yellen introduced so many qualifications that, instead of the proverbial two-handed economist, she more resembled a Hindu goddess with a half-dozen or more appendages.”

No matter what anyone made of Yellen’s remarks, she was in the catbird seat compared to European Central Bank (ECB) President Mario Draghi who spoke after her. Unemployment in the Eurozone stands at 11.5 percent compared to 6.2 percent in the United States. The range of unemployment across the region is quite significant, from 5 percent in Germany to 25 percent in Spain.

Investors and analysts may not have received the insights they’d hoped to gain about U.S. monetary policy, but it’s important to remember that one person’s hedging may be another person’s careful analysis.

Data as of 8/22/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    1.7%    7.6%    20.0%    21.0%    14.2%    6.1%
10-year Treasury Note (Yield Only)    2.4    NA    2.9    2.1    3.5    4.3
Gold (per ounce)    -1.5    6.3    -7.1    -12.1    6.1    12.0
Bloomberg Commodity Index    -0.2    -0.3    -2.8    -7.8    -0.5    -1.6
DJ Equity All REIT Total Return Index    0.8    19.6    22.6    17.7    19.0    9.4
S&P 500, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

MIND THE GAP. Here in America, some of the most important gaps that need to be filled are in estate plans. It’s not enough to have a plan. You also need to make sure all of the components of your plan – from retirement accounts to investments to property – are properly coordinated. Often the gaps in estate plans are related to:

Beneficiary designations: Many financial assets – such as bank accounts, life insurance policies, brokerage accounts, annuities, and retirement accounts – give you the opportunity to name a beneficiary. Typically, assets pass directly to the named beneficiary regardless of instructions in a will. Consequently, it’s important to review beneficiary designations and make sure they align with the intent of your estate plan.

It’s also important to know the rules guiding investment distributions to beneficiaries. Generally, there are two possibilities:

Per stirpes distribution indicates if a beneficiary dies before the account owner does, the beneficiary’s share will go to his or her heirs.

Per capita distribution indicates each beneficiary receives the same amount. If a beneficiary predeceases the account owner, his or her share goes to the other named beneficiaries.

Joint ownership of assets: While joint ownership is common for spouses, joint ownership with children and other relatives has the potential to create some estate planning headaches. Forbes.com suggests estate plans should include “a will, revocable living trust (for most people), and financial and health care powers of attorney – which can accomplish all of the same goals as joint ownership, without the risks and complications.”

A 2013 survey of wealthy investors found nearly 72 percent of participants did not have complete estate plans. If you feel you fall into this category, you may want to schedule a meeting with your financial advisor to assess your estate tax liability, determine your most important goals, and structure a plan that fits your needs. Once in place, you may want to review your estate plan regularly to ensure it is in line with current laws and regulations and that it still expresses your goals.

Weekly Focus – Think About It

“No matter what people tell you, words and ideas can change the world.”
--Robin Williams, actor and comedian

Storytime with Clint Greenleaf

Storytime, piggy bank decorating & cookies were enjoyed by all! Austin author Clint Greenleaf read his book Give, Save, Spend with the Three Little Pigs at PlanningWorks’ party on August 15. His book helps children learn about money in a fun way. Click to view photos!

 

 

 

Market Commentary - Week of 8/18/14

The Markets

If you have young children or grandchildren, you may have read “Alexander and the Terrible, Horrible, No Good, Very Bad Day” by Judith Viorst. Well, that’s what last week was like on the European continent from an economic perspective.

Hopes of economic recovery were put on hold when gross domestic product (GDP) figures across the region showed no – nada, zero, zip – growth overall during the second quarter of 2014. First quarter’s growth (0.2 percent) hadn’t been all that impressive either, but at least it was headed in the right direction. The strongest second-quarter performers were Netherlands, Spain, and Portugal, according to The Economist. However, some of Europe’s largest economies (Italy, Germany, and France) contracted during the period.

Geopolitical unrest prompted the Euro area’s poor showing. Turmoil in the Middle East, violence in Ukraine, and sanctions against Russia have, among other things, led to a slowdown in demand for luxury goods that has negatively affected European economies. After delivering strong performance in 2013, the MSCI Europe Textiles, Apparel, & Luxury Goods Index was down more than 10 percent in the month of July and down 4.75 percent for the year. China’s anti-bribery and corruption campaign also has reduced demand for luxury goods, according to Bloomberg.

The Euro area’s economic growth (or recent lack thereof) has sparked fears of deflation in the region. The Economist offered this insight:

“Deflation would be particularly grave for the euro area because both private and public debt is so high in many of the 18 countries that share the single currency. Even if inflation is positive, but stays low, it hurts debtors as their incomes rise more slowly than they expected when they borrowed. If deflation were to set in, the effects would be worse still: when prices and wages fall, debts, which do not shrink, become harder to repay.”

Woes across the Atlantic put a shine on markets in the United States, according to Reuters. Major U.S. stock markets finished the week ahead and benchmark U.S. treasury yields finished the week at a 14-month low.

Data as of 8/15/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    1.2%    5.8%    17.7%    17.5%    14.8%    6.1%
10-year Treasury Note (Yield Only)    2.4    NA    2.8    2.3    3.5    4.3
Gold (per ounce)    -1.1    7.9    -2.5    -9.3    6.8    12.4
Bloomberg Commodity Index    -1.3    0.0    -3.0    -7.4    0.1    -1.5
DJ Equity All REIT Total Return Index    1.6    18.6    20.3    14.9    20.4    9.6
S&P 500, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

AT A CERTAIN AGE, YOU BEGIN TO UNDERSTAND WHY YOUR ELDERS shook their heads at newfangled ideas like television, 24-hour convenience stores, automobiles, and buying on credit. Here are a few business and marketing trends that may change the way baby boomers think about things:

•    Where words fail, music speaks. Athletic shoe companies, fast-food retailers, and luxury brands are using digital music services to amplify their brand identities and engage with customers. For instance, a well-known cruise line’s playlist includes tunes with fun summer vibes, while a shampoo brand’s list embraces singing-in-the-shower songs.
•    Have a commercial with that commercial. A popular music identification app is helping television networks and advertisers connect with consumers’ second screens – their smart phones and tablets. The app’s logo appears during commercials and TV shows. If viewers interact with the logo, then the show or product has opportunities to re-market to viewers through their mobile devices.
•    It’s a meal ticket, literally. Some of the hottest restaurants around aren’t taking reservations anymore. They’re selling tickets in advance. It’s a business decision that eliminates the cost of last-minute cancellations which may lead to better prices for diners, according to experts cited by National Public Radio.
•    Want to attract a crowd? New and growing businesses have a lot of options when it comes to raising capital. If a business wants to borrow money, in addition to traditional sources, they can turn to peer-to-peer and social lending platforms. If a company wants equity investors, they may pursue equity crowdfunding. In fact, a recent study reported:

“Today, it’s apparent the crowdfunding phenomenon has indeed affected the VC (venture capital) ecosystem – as a complementary force. With thousands of consumer-oriented hardware campaigns looking for financing for everything from smart watches to beacon technologies, crowdfunding platforms… have provided VC investors with a valuable source for dealflow.”

Whether you’re a consumer or a businessperson, it’s important to remain aware of the ways in which the world is evolving and take advantage of opportunities that can make your life easier and/or your business more successful.

Weekly Focus – Think About It

“If your actions inspire others to dream more, learn more, do more and become more, you are a leader.”
--John Quincy Adams, Sixth President of the United States

Market Commentary - Week of 8/11/14

The Markets

During the dog days of summer, a triple dip – three melting scoops of frozen goodness perched precariously on a waffle cone – can be delicious. There are other kinds of triple dips that are a lot less welcome, though. Just look at Italy. 

Last week, the Italian National Institute of Statistics released its preliminary estimate of productivity in the third largest Eurozone economy. It showed Italy’s economy contracted (again) during the second quarter of 2014. That puts Italy firmly in triple-dip territory, according to The Washington Post:

“The greatest trick the devil ever pulled was convincing Italy to join the euro. It hasn't grown since. After its GDP fell 0.2 percent, Italy is stuck in a triple-dip recession. Yes, triple: its economy started shrinking in 2008, relapsed in 2011, and now again in 2014. Although, at this point, it's probably more accurate to just call this a depression. After all, Italy's economy has contracted 11 of the previous 12 quarters. It's been enough to wipe out almost all its growth the past 14 years.”

Much of the rest of Europe is faring somewhat better than Italy, but growth is not robust. Reuters reported Germany’s economy, the largest in Europe, is expected to show stagnant growth during the second quarter of 2014 as the crisis in Ukraine and sanctions on Russia take their toll. German exports to Russia have fallen and German business leaders have said tens of thousands of jobs may be at risk.

All eyes will be on Europe during the next few weeks as second-quarter preliminary growth numbers are released. Experts may have their fingers crossed, hoping the unprecedented package of stimulus measures announced by the European Central Bank (ECB) a couple of months ago will offset the negative effects of geopolitical tensions. However, Bloomberg opined that policy changes often take a while to make a difference. In the meantime, European economies may be vulnerable to risks like geopolitical unrest in Ukraine and the Middle East.

Data as of 8/8/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    0.3%    4.5%    13.8%    19.9%    13.9%    6.1%
10-year Treasury Note (Yield Only)    2.4    NA    2.6    2.3    3.8    4.2
Gold (per ounce)    1.4    9.0    0.9    -8.2    6.8    12.6
Bloomberg Commodity Index    0.2    1.3    1.9    -6.0    -0.4    -1.3
DJ Equity All REIT Total Return Index    0.7    16.8    14.7    20.1    18.0    9.6
S&P 500, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

QUICK! WHAT’S THE FASTEST GROWING COUNTRY IN LATIN AMERICA? Nope, it’s not Brazil. The gross domestic product (GDP) growth forecast for Brazil was lowered from 2.2 percent in January 2014 to 1.8 percent in June 2014, according to The Economist. That means Brazil is expected to grow more slowly than the United States this year.

It’s not Peru, “a country that has enjoyed Asian-style growth averaging 6.4 percent a year in 2003-13.” Peru’s growth has benefited from the country’s role as a major producer of gold and copper. During 2014, Peru dropped to second place in Latin America’s economic growth contest.

So, who’s in first? Here are a few hints:

•    It’s between Ecuador and Venezuela 
•    It has a coastline on both the Pacific Ocean and the Caribbean Sea 
•    It’s the second most bio diverse country in the world (In addition to having lots of butterflies, orchids, and amphibians, it has more bird species than Europe and North America combined.) 
•    Americans of a certain age may remember it as the epicenter of the 1980s war on drugs (Think cartels and FARC guerillas.) 

That’s right. Colombia’s economy is expected to deliver the fastest growth in Latin America during 2014 – and its vibrancy is unrelated to drugs. Like Peru, Colombia is a beneficiary of the commodity lottery. Its main exports are oil and coal whose prices have held up better than those of gold and copper in recent years. In addition, The Economist reported the country has benefitted from a variety of reforms and development efforts including:

“A law in 2012 cut onerous payroll taxes (while raising income tax on the better-off). The result is that formal-sector jobs are growing at 8 percent a year, while the large informal sector has started to shrink, which ought to boost productivity. Ambitious, albeit delayed, private-public partnerships in roads and railways should see investment of up to $25 billion by 2018.”

The country’s leaders also implemented a fiscal rule that has reduced the public-sector deficit to less than 1 percent of GDP.

Colombia’s economic growth potential is mitigated by the risks of its ongoing civil conflict. President Juan Manuel Santos was re-elected after campaigning on a promise to negotiate peace with FARC guerillas.

Weekly Focus – Think About It

“Positive anything is better than negative nothing.”
--Elbert Hubbard, American writer

Market Commentary - Week of 8/4/14

The Markets

Last week, investors took a long look at the crazy quilt of information and events around the world and decided they didn’t like what they were seeing.

Geopolitical tensions puckered a lot of seams: Conflict in Ukraine was embroidered with additional sanctions against Russia, difficulty investigating the downed commercial airliner in Ukraine, and escalating anti-American rhetoric in Russia. Violence continued to roil through Middle East and North Africa. In Libya, hostilities escalated, causing many western countries to withdraw diplomats and leading Tunisia to close its border with the country.

Financial and economic issues overseas, including ongoing issues with one of Portugal’s largest banks, and worries that European companies will be negatively affected by sanctions against Russia, marred investors’ views, too. In addition, controversy swirled around Argentinian bonds. In the midst of a legal battle over bond repayment, the country missed a June interest payment. The ‘credit event’ triggers a payout of about $1 billion for investors who hold insured Argentine debt.

Positive news in the U.S. offered some padding. The U.S. economy continued to recover and gross domestic product increased by 4 percent (annualized) during the second quarter which was a remarkable improvement after first quarter’s contraction. Reuters reported, “Consumer spending growth, which accounts for more than two-thirds of U.S. economic activity, accelerated at a 2.5 percent pace… Despite the pick-up in consumer spending, Americans saved more in the second quarter… which bodes well for future spending.”

The Federal Reserve issued a midweek statement confirming economic recovery was continuing apace. It caused some investors to throw what one expert called a ‘taper’ tantrum. Barron’s said, “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.”

By Friday, U.S. markets had experienced their worst week in two years. As investors adjust to the idea of rising interest rates, markets may experience additional volatility.

Data as of 8/1/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    -2.7%    4.2%    12.8%    14.4%    13.9%    5.7%
10-year Treasury Note (Yield Only)    2.5    NA    2.7    2.7    3.6    4.5
Gold (per ounce)    -0.3    7.5    -1.8    -7.3    6.1    12.7
Bloomberg Commodity Index    -1.7    1.1    0.7    -7.9    -0.6    -1.4
DJ Equity All REIT Total Return Index    -1.5    16.0    12.3    11.9    20.5    9.4
S&P 500, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

JUST AS SOME SCIENCE FICTION NOVELS DESCRIBE PARALLEL UNIVERSES, the Congressional Budget Office (CBO) report entitled The 2014 Long-Term Budget Outlook described alternate realities for the United States, including futures that will be determined by the decisions of our policymakers today and in the future.

The CBO reported, “Between 2009 and 2012, the federal government recorded the largest budget deficits relative to the size of the economy since 1946, causing its debt to soar.” A deficit occurs when the government spends more than it takes in. One consequence of recent deficits is the federal debt (the amount of money the United States owes its creditors) is now equal to about 74 percent of the U.S. economy’s gross domestic product (GDP). That’s the highest percent ever except for a short period around World War II.

If nothing changes – meaning laws governing taxes and spending remain the same, and the economy recovers as anticipated – deficits are expected to remain relatively low from 2015 through 2018. However, after that, the CBO projects government spending on healthcare programs and interest payments will grow and the federal debt could be 106 percent of GDP by 2039.

In an alternate universe, “certain policies that are now in place but are scheduled to change under current law would be continued, and some provisions of law that might be difficult to sustain for a long period would be modified. With those changes to current law, deficits, excluding interest payments, would be about $2 trillion higher over the next decade than in CBO’s baseline.” In that scenario, the debt of the United States balloons, swelling to about 180 percent of GDP by 2039.

A more attractive alternative requires deficit reduction measures. Depending on the amount of deficit reduction, the federal debt could diminish and be 42 to 75 percent of GDP by 2039. We can only hope the United States isn’t the country to answer an economic question recently discussed by The Conference Board: How high can debt-to-GDP ratios rise before crippling a nation?

Weekly Focus – Think About It

“The most difficult thing is the decision to act, the rest is merely tenacity.” 
--Amelia Earhart, American aviation pioneer

Market Commentary - Week of 7/28/14

The Markets

Anchors aweigh! Put thoughts of the Frank Sinatra and Gene Kelly movie aside. If the Naval Academy fight song is playing in your head, tune it out. The anchors being raised here are setting adrift perceptions that government bonds are always low risk investments. 

Behavioral finance – a field of study that looks at behavioral and cognitive psychology in tandem with conventional economics and finance to explain why investors do what they do – tells us investors have been known to make decisions based on faulty reasoning. In some cases, they tend to classify new information based on experience or knowledge.

For instance, people who adhere to the idea U.S. government bonds are low-risk investments might be inclined to take in stride the news that geopolitical tensions pushed bond yields lower during the past two weeks. Who cares that yields are at a low for the year? Government bonds are not risky investments, right?

Not necessarily. While it’s true that U.S. Treasury bonds are backed by the full faith and credit of the U.S. government, they are still subject to the unpredictable changes in the markets. One thing to remember is interest rates and bond prices interact like children on a seesaw. When interest rates go down, bond prices go up. When interest rates go up, bond prices go down. Bond prices generally have been going up since the early 1980s and rates are currently at very low levels. As economies recover and rates start to rise again, bond prices are likely to fall and could have a negative effect on the value of portfolios holding government bonds, particularly those with longer durations. 

Bond yields have stayed low during recent years largely because of Federal Reserve monetary policy. President of the Federal Reserve Bank of St. Louis James Bullard recently said there is a mismatch between our macroeconomic goals and the stance of monetary policy. While this mismatch is not currently causing problems for the economy, it may in the future. This week, Fed officials are expected to discuss when and how to begin lifting rates from near zero – a level they’ve been at since 2008.

Data as of 7/25/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    0.0%    7.0%    17.0%    13.9%    15.0%    6.2%
10-year Treasury Note (Yield Only)    2.5    NA    2.6    3.0    3.7    4.5
Gold (per ounce)    -0.9    7.8    -2.4    -7.1    6.3    12.7
Bloomberg Commodity Index    0.0    2.8    1.2    -7.7    0.9    -1.1
DJ Equity All REIT Total Return Index    -0.7    17.8    10.7    10.9    21.7    9.9
S&P 500, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

‘VIDEO GAMER’ MAY SOON JOIN ASTRONAUT, ATHLETE, AND SUPER HERO on children’s lists of what they want to be when they grow up. Those who reach the top of the e-sport may do well financially since video game competitions can be quite lucrative.

Okay, first, let’s tackle the concept of e-sports. If you’re one of those people who have a hard time thinking of chess or poker as sports, the idea of video games as sports will probably throw you for a loop. However, last week ESPN.com featured The International – the fourth annual world championships of the popular video game ‘Defense of the Ancient 2’ (Dota 2). The event, which was held in KeyArena in Seattle, sold out. In addition, more than 300,000 people watched the event on a popular video game streaming website.

Total prize money for the tournament was $10.9 million, a record for video game competitions and all the more remarkable because fans raised much of the prize money. That’s a big step up from the first championship. It was held in 2011 in Cologne, Germany and the teams competed for a grand prize of $1 million.

The League of Legends championship, another big gaming competition, is coming up in October. Two teams will compete in Sangam Stadium in Seoul, South Korea for bragging rights, the Summoner’s Cup, and $1 million in prize money. USA Today reported last year’s championship “was watched by more people than the NBA Finals, World Series, and BCS (Bowl Championship Series) National Championship [college football].” If that seems like a stunning statistic, consider this: 67 million people play League of Legends every month.

According to PCWorld.com, “Playing PC (personal computer) games has become a bona fide career option and right now business is booming… A confluence of events occurred at just the right time in 2010 to reinvigorate the PC’s strong legacy of hardcore competitive gaming. Most significantly, the PC’s return as professional gaming’s platform of choice is tied to the economic rise of Asia along with huge missed opportunities by console game manufacturers.”

Weekly Focus – Think About It

“The best time to plant a tree was 20 years ago. The second best time is now.” 
--Chinese Proverb

Market Commentary - Week of 7/21/17

The Markets

Events of the last week could have been plot elements in a Tom Clancy novel. Tragically, they were real and ratcheted geopolitical tensions higher around the globe. 

On Wednesday, the United States toughened sanctions against Russia. Bloomberg.com reported the new sanctions prevent specific Russian companies from “…accessing U.S. equity or debt markets for new financing with maturities longer than 90 days. They don’t otherwise prohibit U.S. companies or individuals from doing business with the Russian firms.” The European Union also introduced new sanctions although theirs were more modest than those of the United States. Russian bond and stock markets tumbled on the news.

Soon after, The Washington Post reported the new sanctions were likely to have a more profound affect on Russia. “While earlier sanctions, primarily against individuals, have been largely brushed off as an inconvenience by their Russian targets, the new round appeared designed to cause significant blows to the Russian economy and fundamentally alter its global financial relationships.”

On Thursday, an international commercial airliner carrying hundreds of passengers was shot down over Ukraine by a surface-to-air missile. No one has acknowledged responsibility; however, Ukrainian officials labeled the event an act of terrorism as it happened in an area of Eastern Ukraine plagued by violence associated with a pro-Russia separatist uprising. When this commentary was written, it remained uncertain whether the crash was an act of aggression or a tragic accident. 

Understandably, investors took the news poorly and fled to ‘safer’ investments. The Standard & Poor’s 500 Index lost 1.2 percent for the day – its biggest one-day drop since April. Ten-year U.S. Treasury yields also dropped and the rate on Germany’s 10-year bond closed at a record low. Stock market losses also reflected Israel’s ground offensive in Gaza.

American markets rebounded on Friday although geopolitical tensions continued to shadow economic and earnings news.

Data as of 7/18/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    0.5%    7.0%    17.1%    14.9%    15.8%    6.0%
10-year Treasury Note (Yield Only)    2.5    NA    2.5    2.9    3.6    4.4
Gold (per ounce)    -2.1    8.8    1.9    -6.5    6.5    12.4
Bloomberg Commodity Index    -0.7    2.8    -0.2    -7.6    1.2    -1.3
DJ Equity All REIT Total Return Index    1.3    18.6    9.6    12.1    23.3    9.5
S&P 500, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

AS YOU’RE PLUNKING BAIT, LOLLING ON THE BEACH, OR PADDLING A STREAM, let your thoughts turn to… taxes. Sure, it’s a lot easier not to think about taxes until you have to, but by then it’s usually too late to do anything that might make a difference. Late summer, when your blood pressure is nice and low, is the perfect time to decide whether you need to take any steps to prepare for this year’s taxes. Consider Forbes’ assessment of top tax brackets for 2014 before you stop reading:

Single taxpayers earning:
•    Over $36,900 up to $89,350 may owe $5,081.25 plus 25 percent of the excess over $36,900
•    Over $89,350 up to $186,350 may owe $18,193.75 plus 28 percent of the excess over $89,350
•    Over $186,350 up to $405,100 may owe $45,353.75 plus 33 percent of the excess over $186,350
•    Over $405,100 up to $406,750 may owe $117,541.25 plus 35 percent of the excess over $405,100
•    Over $406,750 may owe $118,118.75 plus 39.6 percent of the excess over $406,750

Married taxpayers filing jointly and earning:
•    Over $73,800 up to $148,850 may owe $10,162.50 plus 25 percent of the excess over $73,800
•    Over $148,850 up to $226,850 may owe $28,925 plus 28 percent of the excess over $148,850
•    Over $226,850 up to $405,100 may owe $50,765 plus 33 percent of the excess over $226,850
•    Over $405,100 up to $457,600 may owe $109,587.50 plus 35 percent of the excess over $405,100
•    Over $457,600 may owe $127,962.5 plus 39.6 percent of the excess over $457,600

Apologies if your blood pressure just jumped higher. Take a deep breath and decide whether these tips, offered by The Fiscal Times, can help.

1.    Manage your taxable income effectively. It may be possible to reduce your taxable income by deferring it, making contributions to pre-tax investments (like retirement accounts), and making gifts of income producing investments or cash to family members. 
2.    Generate investment losses. Selling depreciated assets can help generate losses and losses may offset capital gains. 
3.    Accelerate income if you are subject to the alternative minimum tax (AMT). Forbes offered additional insight to this suggestion. “While a taxpayer’s regular taxable income is subject to graduated rates with a low of 10 percent and a high of 39.6 percent, AMT income is taxed at a flat 28 percent rate… And where I come from, 28 percent is less than 39.6 percent. And it’s this variance that gives rise to an often-overlooked planning opportunity.”

None of the above is intended as tax advice. It’s food for thought. Before you do anything, talk with a tax professional about your financial situation.

Weekly Focus – Think About It

“A closed mouth catches no flies.”
--Miguel de Cervantes, Spanish novelist

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