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Market Commentary - Week of 12/16/13

The Markets
You really need to take predictions with a grain of salt. Consider these esteemed opinions:

•    "I think there is a world market for maybe five computers." Thomas Watson, Chairman, IBM, 1943
•    "Who wants to hear actors talk?" H. M. Warner, Founder, Warner Brothers, 1927
•    "Everything that can be invented has been invented." Charles Duell, Commissioner, U.S. Office of Patents, 1899

It’s important to remember the fallibility of experts as we head toward a new year and pundits begin pontificating about the events of the past and predicting what may be ahead.

Barron’s recently pointed out how well U.S. stock markets have performed this year: “Not since 1995, when stocks climbed 34 percent without as much as a 3 percent dip, have we enjoyed a year as agreeable as this. No pain, all gain has turned U.S. stocks into a consensus favorite, the People's Choice award winner, the king of the hill. But, it's no longer the road less traveled.”

The publication tweaked market optimists by pointing out economists’ consensus opinion the U.S. economy will grow by 2.6 percent – admittedly a pretty modest pace for growth – may not seem like a stretch, but it could be. The point was 2014 is almost certain to bring some jarring economic transitions like less monetary support through quantitative easing. Reduced liquidity could negatively affect economic growth (Gross Domestic Product growth in 2013 is projected to be just 1.7 percent).

In a separate article, Barron’s shared insights from 10 strategists – Wall Street professionals who acknowledged 2014 may offer investors a bumpy road. However, their consensus expectation is the Standard & Poor’s 500 will finish 2014 higher. “…Their mean prediction is 1977. The bullish consensus might trouble contrarians, but Wall Street's pros see ample reason for optimism, given their expectations of a stronger economy and rising corporate profits.”

As you read conflicting opinions about where we’ve been and where we’re going, it’s critical to remember short-term macroeconomic and market predictions should not be given too much weight. You built your investment strategy to meet your long-term investment goals.  

Data as of 12/13/13
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    -1.7%    24.5%    25.1%    12.7%    15.4%    5.2%
10-year Treasury Note (Yield Only)    2.9    NA    1.7    3.3    2.5    4.3
Gold (per ounce)     -0.1    -27.3    -27.2    -4.2    8.3    11.7
DJ-UBS Commodity Index    0.6    -9.3    -9.7    -6.9    2.3    -0.8
DJ Equity All REIT TR Index    -2.3    0.5    3.4    10.1    19.5    8.6
Notes: S&P 500, Gold, DJ-UBS 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 TR 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.

IS THAT A DRONE? FLYING THROUGH MY NEIGHBORHOOD? There may be a new entry on the list of military inventions that have been repurposed for commercial use: Unmanned Aerial Vehicles (a.k.a. UAVs or drones) may soon join global positioning systems (GPS), duct tape, EpiPens, cargo pants, microwaves, and a wealth of other goods Americans rely on in everyday domestic life.

Drones are remote-controlled flying robots. They may be as small as insects or as large as jumbo jets. Today, they’re most known for delivering stealth attacks on selected targets and military service which has included stints on domestic border surveillance and overseas reconnaissance. In the future, they may be thought of as handy tools that help manage a variety of tasks. While no one can be sure which opportunities will pan out and which won’t, there are a lot of potential applications including:

•    Information gathering. Journalism students at the University of Missouri in Columbia are learning to fly drones! They’re gathering pictures, videos, and other news-worthy information. Yes, there are some privacy issues. Already, 42 states are considering bills restricting drone use.
•    Improving agriculture. Students at Oklahoma State University are researching the roles drones could play in increasing yields and monitoring crops for blight and diseases.
•    Disaster relief. The Harvard-MIT Division of Health Sciences and Technology received a grant to develop drones to deliver vaccines and medicines to remote locations and disaster areas.
•    Wildlife research. The U.S. Geological Survey has been using a camera-equipped drone to complete aerial counts of sandhill cranes, and scientists in Indonesia are using drones to study endangered Sumatran orangutans from above the treetops.
•    Shipping goods. American internet retailers are experimenting with using drones to ship goods from fulfilment centers directly to customer’s doors. It may be 2015 before you receive a drone delivery because the Federal Aviation Administration still needs to issue some rules governing drone operations.

So, if you’ve been asking yourself, “What’s the next big thing?,” you might want to read up on drones. They could be it.

Weekly Focus – Think About It

“Peace is not absence of conflict, it is the ability to handle conflict by peaceful means.”
--Ronald Reagan, 40th American President

Market Commentary - Week of 12/9/13

The Markets
If every piece of positive news was a petal, then you might say the American economy was in bloom last week. Moving into the holiday season, consumer confidence was at a five-month high.

Early in the week, manufacturing showed improvement. On Thursday, the U.S. Commerce Department unfurled the news the American economy grew faster than expected during the third quarter of 2013. The next day, it was reported the unemployment rate was at the lowest level since 2008. Hourly earnings increased, as did the length of the work week. Participation in the work force improved slightly, although it remains at historical lows.

There are sound reasons to expect America’s resurgence will continue into 2014, according to The Economist. They reported America’s progress was due, in part, to:

•    Policymakers in the U.S. providing direct government support for failing companies and creating liquid capital markets that helped companies recover after the financial crisis.
•    Companies benefitting from an increase in domestic energy production. Often the fuel comes from unconventional sources.
•    American businesses leading the way in social media. They are expected to blaze the trail when finding ways to profit from Big Data and developing a sharing economy.

There was good news in other parts of the world, too. A global trade agreement – the first major deal in 20 years – was reached that could simplify customs procedures and speed up the flow of goods across the world. CNN Money hailed it as the most significant multilateral trade pact since the World Trade Organization was founded. The agreement has the potential to reduce trade costs by as much as 15 percent, saving developing nations about $445 billion each year, and boost the global economy.

Despite the good economic news, U.S. stock markets slumped through Thursday of last week largely because of investors’ concerns that positive economic news would encourage the Federal Reserve to end quantitative easing sooner rather than later. Those concerns seemed to dissipate with the release of positive employment numbers on Friday and markets surged higher.

Data as of 12/6/13
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    0.0%    26.6%    27.7%    13.9%    14.7%    5.4%
10-year Treasury Note (Yield Only)    2.9    NA    1.6    2.9    2.7    4.3
Gold (per ounce)     -1.6    -27.2    -27.2    -4.5    10.0    11.8
DJ-UBS Commodity Index    0.9    -9.8    -12.0    -6.7    2.7    -0.7
DJ Equity All REIT TR Index    0.8    2.9    5.5    10.5    17.4    8.9
Notes: S&P 500, Gold, DJ-UBS 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 TR 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.

LET’S TAKE A STROLL DOWN MEMORY LANE… In a recent issue, The Economist pointed out during March 2009 the prospects for American companies were pretty sketchy:

“…The Dow Jones Industrial Average closed below 6,627, a 53% decline from its all-time high less than two years earlier. The number of American firms in the global top ten by market capitalization was on its way down from six to three, and America’s share of the top 50 companies from 50% to 40%. Once regarded even in Communist China as the business model for the world, corporate America had lost its crown.”

Oh, the difference just a few years can make! According to a November 18, 2013 article on Economist.com, If we look ahead to 2014, American firms are expected to comprise the majority of the global top ten (when measured by market value) and make up almost two-thirds of the top 50 companies in the world. It’s not all that surprising when you consider the fact, as a headline in Forbes announced, corporate profits are at an all-time record peak making up almost 70 percent of U.S. gross domestic product.

That may have something to do with the way Americans are spending their money. Citing an expert from Bank of America Merrill Lynch, Barron’s reported:

“U.S. import growth has shrunk from 11% to less than 1% between 2010 and 2013, while job growth has repaired from a negative 1.7% to 1.6%... Domestically produced energy now accounts for 87% of what we consume, up from 70% five years ago, and the share of vehicles sold here that are manufactured stateside has risen from 63% to 73%… We're also spending more on domestic goods and services... Nearly 40,000 Americans turn 65 every week, and aging boomers tend to steer more of their disposable income toward services like medical care, accommodation, and recreation that are typically made in America.”

Perhaps what Alexis de Tocqueville, French historian and political thinker, said about America still holds true, “The greatness of America lies not in being more enlightened than any other nation, but rather in her ability to repair her faults.”

Weekly Focus – Think About It

“When even one American who has done nothing wrong is forced by fear to shut his mind and close his mouth, then all Americans are in peril.”
--Harry S. Truman, American President

Market Commentary - Week of 12/2/13

The Markets
In 2006, Time Magazine’s Person of the Year was ‘You.’ The magazine declared that 2006 was about:

“…Community and collaboration on a scale never seen before… It's about the many wresting power from the few and helping one another for nothing and how that will not only change the world, but also change the way the world changes.”

Last week, J.P. Morgan named EVERYONE the winner of the "Most Promotional Retailer Award." While communities across America are very interested in Black Friday sales, these events are less about empowerment and more about brawling for consumer goods. It’s a popular activity. In fact, a case could be built that one of the newest Thanksgiving holiday traditions involves the telling of riveting Black Friday (and now Thanksgiving Day) tales that describe retail shopping bravado and adventure.

It may prove to be a short-lived tradition if mobile devices and online sales continue to gain popularity. According to IBM Digital Analytics Benchmark, which collects data from roughly 800 U.S. retail sites in real time, as cited in Barron’s, online sales were up 20 percent on Thanksgiving Day this year as compared to last year. They slowed a bit on Black Friday, up just 9 percent relative to last year by mid-afternoon. Many of the folks who chose to forego shopping in stores made their purchases using mobile devices which accounted for 37 percent of online sales on Friday.

Holiday shoppers and retailers aren’t the only ones who appreciate robust holiday sales, so do state governments. Ron Alt, senior research associate at the Federation of Tax Administrators, was cited by USA Today as saying “about 10 percent of annual state sales taxes come in to state coffers in January from holiday season sales, topping most other months in which about 7 or 8 percent of the taxes are collected.”

We hope your Thanksgiving holiday was filled with wonderful people and adventures.

Data as of 11/29/13
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    0.1%    26.6%    27.5%    15.0%    17.2%    5.4%
10-year Treasury Note (Yield Only)    2.8    NA    1.6    2.8    2.7    4.4
Gold (per ounce)     0.5    -26.0    -27.4    -2.6    9.0    12.1
DJ-UBS Commodity Index    0.3    -10.7    -13.5    -5.4    1.0    -0.4
DJ Equity All REIT TR Index    -0.8    2.1    6.2    10.9    25.4    8.9
Notes: S&P 500, Gold, DJ-UBS 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 TR 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.

PENSIONS AROUND THE WORLD… Here’s something a lot of people are thankful for: pensions. There are public pensions, which generally are funded by tax dollars, and private pensions, which generally are funded by companies. Merriam-Webster.com defines pension as, “an amount of money that a company or the government pays to a person who is old or sick and no longer works.” The Economist takes a slightly different view although its focus was on public pensions:

“A pension is a claim on the earnings of future workers. Some countries choose to pay these claims out of future taxes; others set up special funds to invest in financial assets. But these assets (equities, bonds and property) will be able to pay pensions only because future workers generate the income to make them valuable.”

In the late 2000s, tax-financed pensions made up almost 60 percent of gross income on average for people age 65 and older who lived in the 34 countries that comprise the Organization for Economic Co-operation and Development (OECD). Europeans were the most dependent on their governments. Older Belgians and Finns, on average, received about 80 percent of gross income from the state. Older Chileans, Americans, and Canadians were the least reliant. Chileans over age 65 received less than 10 percent of gross income from the government. For Americans and Canadians, government pensions made up about 40 percent of income on average.
 
In general, public and private pension funds have done pretty well in 2013. They were helped by rising stock prices and higher bond yields. However, the challenges they face, including increasing longevity and volatile markets, are relatively daunting. That’s one reason private pensions have been disappearing in United States. The number of employer-sponsored defined benefit pension plans reached an all-time low of about 22,700 single-employer plans in early 2013. That’s down from just over 112,000 in 1985.

Weekly Focus – Think About It

“When you rise in the morning, give thanks for the light, for your life, for your strength. Give thanks for your food and for the joy of living. If you see no reason to give thanks, the fault lies in yourself.”
--Tecumseh, Native American leader of the Shawnee

Market Commentary - Week of 11/25/13

The Markets
 Really?!

Okay. Okay. If you’ve been trekking through Siberia or Patagonia for about a year, then maybe it surprised you to hear the minutes from the Federal Reserve Open Market Committee meeting showed it expects to begin tapering Quantitative Easing (QE) in the coming months.

However, since the Fed has been telling anyone who will listen – telling them over and over and over again – that its intent is to slow the pace at which it buys bonds as the U.S. economy strengthens (and since most people haven’t been exploring the hinterlands where the convenience of modern communications may not be readily available), it’s difficult to understand why that information was so surprising that it pushed stock and bond markets significantly lower.

It might have been easier to understand market declines if they had occurred on Tuesday after the Organization for Economic Cooperation and Development (OECD) released its revised economic outlook. In his speech, OECD Secretary-General Angel Gurría said:

“The recovery of the global economy is progressing at a moderate and uneven pace. World GDP growth, which averaged about 4 percent per year in the decade up to the onset of the global crisis, is expected to reach only 2.7% in 2013, the lowest rate since 2009. While we expect global growth rates to move again towards 4 percent in 2015, the world will continue to be affected by the harsh social legacy of the crisis… The recovery itself is exposed to potential downside risks, including fiscal brinkmanship in the United States, unresolved banking problems in the euro area, the high debt burden in Japan, and financial vulnerabilities in some large emerging-market economies.”

Gurría also said, in the OECD’s long-term view, economic weakness was the result of investment remaining anemic, credit growth remaining subdued, trade growth gaining sluggishly, and growth in emerging economies faltering.

Regardless, the markets’ downward foray was short-lived. On Friday, the Standard & Poor’s 500 Index closed above 1800 for the very first time. Other U.S. markets moved higher as well.

Data as of 11/22/13
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    0.4%    26.5%    28.1%    14.6%    16.2%    5.6%
10-year Treasury Note (Yield Only)    2.8    NA    1.7    2.8    3.3    4.2
Gold (per ounce)     -3.2    -26.4    -28.0    -2.8    8.7    12.3
DJ-UBS Commodity Index    0.5    -11.0    -14.1    -5.1    0.0    -0.1
DJ Equity All REIT TR Index    -2.1    2.8    6.9    11.5    21.3    9.2
Notes: S&P 500, Gold, DJ-UBS 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 TR 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.

AN OH-SO-BRIEF BRIEF ON DIGITAL MONEY… If you read or watched the news during the past few months, you may already know this, but there has been an explosion of interest in digital money. That’s the reason you may be hearing and reading about dozens of companies that are rushing to coin virtual currency that has real value. It just seems so 21st Century, doesn’t it?

Odds are you’ve already used digital money. For example, you used it the last time you purchased something online. Digital money is what we use when we pay or are paid electronically. Think smart phones and credit cards. Digital money is not tangible; however, it is possible to convert digital money that is part of a large centralized banking system into paper money by making a withdrawal from an ATM.

In the United States, the Federal Reserve is responsible for maintaining the integrity of U.S. bills and coins by setting monetary policy. Digital currency companies offer a parallel currency universe; a means of transferring electronic money from one person to another without using traditional banking or money-transfer systems.

Digital money companies appear to be delivering American economist Milton Friedman’s dream, according to The Economist. Years ago, Friedman suggested the Federal Reserve be abolished and replaced by an automated system that would increase money supply at a steady, pre-set rate. He believed such a system would better control inflation, making spending and investment decisions more certain. The Economist article said:

“In theory, then, the system ought to keep a lid on inflation – making it attractive to critics of interventionist monetary policy of the sort practiced since 2008 by America's Federal Reserve under the label quantitative easing… It offers other apparent benefits, too. The currency can be used by anyone (unlike credit cards, for instance), anywhere. Transaction costs are also likely to be lower than those for traditional payment systems, though these are not in fact zero…”

The Economist goes on to point out a key difference between central-bank-controlled currencies (which often offer both bills and coins and digital currencies) and digital currency companies is the former are backed by a country’s regulations and laws; the latter are answerable to online communities using the currencies.

Weekly Focus – Think About It

“A business that makes nothing but money is a poor business.”
--Henry Ford, American Industrialist

Market Commentary - Week of 11/18/13

The Markets
If you found holiday songs or Beatles tunes humming through your head last week, it may have been your subconscious processing world and market events.

Over the river and through the woods/To Grandmother's house we go… Janet Yellen, current Vice Chairman and nominee to be the next Chairman of the Federal Reserve System, testified at her confirmation hearing before the U.S. Senate’s Committee on Banking, Housing, and Urban Affairs on Thursday. Her comments were widely interpreted as indicating that current stimulus measures will remain in place. This made investors happy and helped push global stock markets higher.

In the United States, the Dow Jones, S&P 500, and NASDAQ, all appear to be headed toward milestones. The Dow is nearing 16,000, the S&P is closing in on 1,800, and the NASDAQ is approaching 4,000.

You say you want a revolution/Well you know/We all want to change the world… China’s third plenum of the 18th Central Committee, which also is being referred to as a blueprint for reform, a reform manifesto, and the Decision on Major Issues Concerning Comprehensively Deepening Reforms, is ambiguously phrased, according to The Economist. However, it appears to encourage:

“…Experimentation in everything from trading rural land to the freeing of controls on interest rates. Barriers to migration will be further broken down and the one-child policy relaxed. A widely resented system of extra-judicial detention, known as laojiao (re-education through labor), will be scrapped.”

China’s leaders also promised to elevate the role of markets in the economy. That news helped push Shanghai Composite Index higher last week.

Data as of 11/15/13
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    1.6%    26.1%    32.9%    14.5%    16.2%    5.6%
10-year Treasury Note (Yield Only)    2.7    NA    1.6    2.9    3.7    4.2
Gold (per ounce)     0.1    -24.0    -24.7    -2.0    11.9    12.6
DJ-UBS Commodity Index    0.0    -11.4    -12.4    -6.1    0.0    -0.4
DJ Equity All REIT TR Index    1.3    5.0    12.9    12.0    21.9    9.3
Notes: S&P 500, Gold, DJ-UBS 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 TR 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.

HAVE YOU BEEN OFFERED A LUMP SUM DISTRIBUTION? Not too many employers offer pension plans anymore. You know, pension plans. The kind of retirement plans that employers used to offer; the type where employees generally didn’t contribute and the benefits they received in retirement were determined by their salaries, length of employment, and other factors.

If you’ve ever worked for a company that had one, it’s possible that the offer of a lump sum distribution may be headed your way. If you accept a lump sum distribution, you’re choosing to receive a pile of cash today instead of monthly or annual pension payments in retirement. Basically, you’re agreeing to take responsibility for investing the money and generating a stream of income during retirement so your employer doesn’t have to do those things.

Why are companies offering lump sum distributions? The Pension Protection Act of 2006 (PPA) established new accounting rules. Companies with pension plans must recognize their plans’ funded status on their balance sheets each year. Since balance sheets are scrutinized by analysts and investors, and lots of pension plans are underfunded, companies decided it was time to take action.

How underfunded are these plans? A Wilshire Associates report cited by Reuters found the difference between the amount that S&P 500 companies will owe to retired workers and the amount those companies have set aside to pay retirees is more than $1.5 trillion. How much is that? Well, if you took one trillion one-dollar bills and strung them end-to-end, the chain would stretch further than the distance from the earth to the sun!

Anyway, having an underfunded plan became a corporate finance headache. Two-thirds of companies that have pension plans are trying to limit the effect of those plans on their financial statements (69 percent) and cash flows (58 percent), as well as reduce the overall cost of their plans (41 percent), according to a recent Towers Watson survey. CFO Research in collaboration with Mercer said employers plan to do this by:

•    Adopting more conservative investment strategies
•    Transferring pension obligations to insurance companies by purchasing annuities
•    Offering lump-sum payouts to retired and current employees

In many cases, accepting a lump sum payout rather than having income from a pension may have a significant impact on your retirement.

Weekly Focus – Think About It
“The average 401(k) account balance fell 34.8 percent in 2008, then rose from 2009 to 2011. Overall, the average account balance increased at a compound annual average growth rate of 5.4 percent over the 2007-2011 period, to $94,482 at year-end 2011… The median 401(k) account balance (half above, half below) increased at a compound annual average growth rate of 11.5 percent over the period, to $42,082 at year-end 2011.”
-- Employee Benefit Research Institute, June 2013 [12]

Market Commentary - Week of 11/11/13

The Markets
After last week’s surprisingly strong employment report, it’s almost possible to picture Ben Bernanke slapping trail dust from his leg, ducking his head, and saying, “Just doin’ my job.”

After all, running the economy is as laden with complications and unexpected events as a cattle drive. Richard Graboyes, an economist who was once the Director of Education for the Federal Reserve Bank of Richmond, wrote that driving cattle seems “arduous, but simple – walk some cattle from point A to point B. But, the endeavor is fraught with natural and human risks for both rancher and driver.”

Clearly, the head of the Fed and the head of a cattle drive face different challenges. According to The Federal Reserve System: Purposes and Functions publication:

“The Federal Reserve sets the nation's monetary policy to promote the objectives of maximum employment, stable prices, and moderate long-term interest rates. The challenge for policymakers is that tensions among the goals can arise in the short run and that information about the economy becomes available only with a lag and may be imperfect.”

Last week, the employment numbers seemed to support the idea the economy is gaining steam. According to Forbes, employers added more than 200,000 jobs in October, which was far more than economists had anticipated. The government continued to employ fewer people (employees furloughed during the government shutdown were still counted as being employed). There were 12,000 fewer government jobs in October, and 94,000 fewer for the year. The biggest employment gains were in the hospitality, retail, technical services, manufacturing, and health care sectors.

It’s not time to whoop and holler, though. The New York Times reported the labor force participation rate fell to 62.8 percent, which is a 35-year low. More than 700,000 jobs disappeared during October which was the largest monthly drop since the end of 2009. A smaller labor force can make overall unemployment rate appear to be lower than it is. Let’s hope the labor force isn’t like a herd of cattle that moves too fast and arrives at market a lot skinnier and worth a lot less.

Data as of 11/8/13
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    0.5%    24.2%    28.5%    13.1%    14.0%    5.4%
10-year Treasury Note (Yield Only)    2.8    NA    1.6    2.6    3.8    4.5
Gold (per ounce)     -1.6    -24.1    -25.1    -2.5    11.3    12.9
DJ-UBS Commodity Index    -0.5    -11.4    -12.9    -7.1    -1.2    -0.3
DJ Equity All REIT TR Index    -3.9    3.6    8.1    9.4    18.4    9.3
Notes: S&P 500, Gold, DJ-UBS 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 TR 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 WERE ASKED TO COMPARE TEACHERS’ SOCIAL STATUS TO THAT OF other professions, how would it compare? Are teachers like doctors? Librarians? Social workers? Nurses? Local government officials? Web designers? Lawyers? Policemen? Engineers? Accountants?

Education and training have a profound effect on economies and individuals. In the United States, people who have graduated from college tend to earn more than those who have graduated from high school. Earning an MBA, JD, or MD can translate into significantly higher earnings over a lifetime. Clearly, becoming educated has a significant economic value.

What value, then, do we place on those who provide education? How much respect do we have for the people who teach and train us? As it turns out, the answer varies widely from country to country. According to the Varkey GEMS Foundation’s Global Teacher Status Index survey, which surveyed 21 countries to determine the status of teachers, people in China, Greece, and Turkey have the highest level of respect for teachers and their social standing.

So, how does the teaching profession compare to other professions? In the Czech Republic, Egypt, Switzerland, and many other countries, survey respondents said teachers have the status of social workers. In Brazil, France, Turkey, and the United States, people think teachers are roughly on par with librarians. The Japanese think teachers have the same status as local government managers. More than one-third of Chinese participants said teachers had the same status as doctors. According to the report:

“The U.S. ranked in the middle of the Teacher Status Index with a score of 68.0. Notably, the ranking of primary school teachers is at the higher end of the table and above all the European countries. U.S. respondents scored consistently across the different variables in the study, demonstrating moderate to positive respect for their teachers.”

As you might expect, the more respect a country had for teachers, the more likely people in that country were to encourage their children to enter the profession. Parents in China, South Korea, Turkey, and Egypt were most likely to encourage kids to become teachers.

Weekly Focus – Think About It

 “Education is the key to success in life, and teachers make a lasting impact in the lives of their students.”
-- Solomon Ortiz, Former U.S. Representative from Texas

Who needs Estate Planning?

BUT, I DON’T NEED ESTATE PLANNING … DO I?

 

Why estate planning is so important, and not just for the rich.

 

Provided by PlanningWorks

 

Do you have an estate? It doesn’t matter how limited (or unlimited) your means may be, and it doesn’t matter if you own a mansion or a motor home. Rich or poor, when you die, you leave behind an estate. For some, this can mean real property, cash, an investment portfolio and more. For others, it could be as straightforward as the $10 bill in their wallet and the clothes on their back. Either way, what you leave behind when you die is considered to be your “estate”.

 

If the estate is small, should you still plan? Well, even if you’re just leaving behind the $10 bill in your wallet, who will inherit it? Do you have a spouse? Children? Is it theirs? Should it go to just one of them, or be split between them? If you don’t decide, you could potentially be leaving behind a legacy of legal headaches to your survivors. This, quite simply, is what estate planning is all about – deciding how what you have now (money and assets) will be distributed after your lifetime.

 

Do you HAVE to create an estate plan? While it is absolutely possible to die without planning your estate, I wouldn’t say it is advisable. If you die without an estate plan, your family could face major legal issues and (possibly) bitter disputes. So in my opinion, everyone should do some form of estate planning. Your estate plan could include wills and trusts, life insurance, disability insurance, a living will, a pre- or post-nuptial agreement, long-term care insurance, power of attorney and more.

Market Commentary - Week of 11/4/13

The Markets
Exceptional… exceeds expectations… meets expectations… needs improvement… unsatisfactory. It’s a rating system familiar to anyone who has ever received a performance review. Right now, the performance of inflation is not meeting expectations – and that may be a good thing.

Critics of loose monetary policy and rock bottom interest rates have had high expectations for inflation. That is, they have predicted inflation will rise. In March 2012, Martin Feldstein, a professor of economics at Harvard and President of the National Bureau for Economic Research, explained the massive liquidity created in the United States by the Federal Reserve’s easy money policies created a risk of rising inflation. A rapid increase in bank credit would boost the money supply and the rate of inflation unless the Fed raised interest rates in a timely way and on an adequate scale.

So far, low interest rates and unusually aggressive monetary policies haven’t led to higher inflation in the United States or other at-risk regions. The Conference Board’s Harmonized Index of Consumer Prices (HICP), an inflation measure, showed prices in the United States increased by 0.8 percent in September 2013. That’s slower than the 2.1 percent increase reported for 2012. 
In the Eurozone, the inflation rate for October fell to 0.7 percent, which was the lowest in almost four years. A recent article in The Economist explained it like this:

“So, why haven't we had the inflation that some predicted in the wake of quantitative easing? The reason is that central banks are not the only, nor indeed the main, money creators. Money is usually created by the private banking system and that has been trying to shrink. If the money supply is a bath, then the central banks may have turned on the taps, but the commercial banks have pulled out the plug.”

That may mean, despite stable and falling inflation rates in some regions, we’re not out of the woods yet. As Mr. Feldstein wrote last March, commercial banks could begin to lend funds to firms and households. If that happens, “Loans could add to deposits and cause the money supply to grow. They would also increase spending by the borrowers, adding directly to inflationary pressure.”

Data as of 11/1/13
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    0.1%    23.5%    23.4%    14.2%    12.8%    5.2%
10-year Treasury Note (Yield Only)    2.6    NA    1.7    2.6    3.9    4.4
Gold (per ounce)     -3.0    -22.9    -23.9    -1.2    12.4    13.1
DJ-UBS Commodity Index    -2.9    -10.9    -13.4    -5.6    -1.2    -0.1
DJ Equity All REIT TR Index    -1.3    7.8    11.1    12.2    16.2    9.8
Notes: S&P 500, Gold, DJ-UBS 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 TR 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.

HOW DO YOUR STATE’S TAXES STACK UP? It all depends on who you ask and what types of taxes you’re considering.

The Tax Foundation’s State Business Tax Climate Index for 2014 reported the most tax-friendly states for business were Wyoming, South Dakota, Nevada, Alaska, and Florida. The least tax-friendly were Rhode Island, Minnesota, California, New Jersey, and New York. Every state has property taxes and unemployment insurance taxes, but those in the top ranks tend not to have one or more of the major taxes: corporate income tax, individual income tax, or sales tax. According to the Foundation, “Wyoming, Nevada, and South Dakota have no corporate or individual income tax; Alaska has no individual income or state-level sales tax; Florida has no individual income tax.” It is interesting to note three of the top states are among the least populated in the United States.

Kiplinger’s says that Delaware, Wyoming, Louisiana, Mississippi, and Arizona are some of the most tax-friendly states for individuals because they levy some of the lowest taxes in the country. California, Connecticut, New Jersey, New York, and Hawaii are far less friendly. All have high income tax rates and assess above-average property taxes, which puts them at the bottom of the list of tax-friendly states for individuals. According to state tax policy director for the Institute on Taxation and Economic Policy Meg Wiehe, who was quoted in Kiplinger’s, “Low tax revenues may give a state less money to spend on education, transportation, public safety, and other services important to you and your family... Low taxes don't necessarily lead to a higher quality of life.”

If you’re retiring soon or have already retired, then you may want to consider a move to Alaska, Wyoming, Georgia, Arizona, or Mississippi which have some of the lowest taxes for retirees in the United States. According to Kiplinger’s assessment of state tax laws, retirees may want to avoid Rhode Island, Vermont, Connecticut, Minnesota, and Montana which are some of the least generous with retiree tax credits.

If, after reading this, you’re considering a move to the Equality State (aka the Cowboy State), here are some other things Wyoming has to offer: Yellowstone, the Grand Tetons, Jackson Hole, and about 172 days a year with a temperature below freezing!

Weekly Focus – Think About It

“A lie gets halfway around the world before the truth has a chance to get its pants on.”
-- Winston Churchill, British Prime Minister

Market Commentary - Week of 10/28/13

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The Markets
Contrarians probably are waiting for the other shoe – or, in this case, U.S. stock markets – to drop.

If you’re not familiar with contrarian investing, the theory goes something like this: Consensus opinion is often wrong. When the majority of investors have a bullish outlook and believe stocks are going to move higher, the chances are stock values will drop. Likewise, when the majority has a bearish outlook and believes stocks are going to move lower, the chances are stock values will rise.

Why would Contrarians expect markets to head south? One reason is bullish sentiment is high. On October 23, the American Association of Individual Investors’ Investor Sentiment Survey, which measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months, shows 49.2 percent are bullish and just 17.6 percent are bearish (the rest are neutral). The long-term averages for bullish and bearish sentiment are 39 percent and 30.5 percent, respectively.

Contrarians also are eyeballing the fact that stock markets in the United States have run up for 519 sessions without as much as a 10 percent correction, according to Barron’s. That means markets have weathered bombs at the Boston marathon, chemical weapons in Syria, monetary policy uncertainty, U.S. government shutdown, and Miley Cyrus’ VMA performance. Of course, 519 sessions is not the longest winning streak ever, not even close. In fact, if we assume about 250 trading sessions in a year, then the current rally would have to last until about 2018 to match the record (1,767 sessions) set between October 1990 and October 1997.

Investors aren’t the only bullish faction. Money managers who participated in Barron’s latest big money poll also seem to have adopted Alfred E. Neuman’s motto: What, me worry? Their outlook seems to focus on the Fed’s loose monetary policy. According to Barron’s, “Four of five money managers in our big-money poll expect stocks to be the best-performing asset over the next year, even as 71 percent see U.S. shares as already fairly valued. Thanks to unending central bank support, we all expect above-par stock returns from sub-par economic growth.”

So, what’s going to happen? Only time will tell.

Data as of 10/25/13
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    0.9%    23.4%    24.5%    14.1%    15.7%    5.5%
10-year Treasury Note (Yield Only)    2.5    NA    1.8    2.6    3.7    4.3
Gold (per ounce)     2.4    -20.4    -21.4    0.3    13.9    13.3
DJ-UBS Commodity Index    -0.9    -8.3    -11.2    -4.5    0.0    0.1
DJ Equity All REIT TR Index    0.5    9.2    13.3    12.2    21.1    10.2
Notes: S&P 500, Gold, DJ-UBS 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 TR 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.

WHERE ARE INTEREST RATES HEADED? According to the Federal Reserve, economists assume interest rates will move toward equilibrium or a ‘natural’ real rate of interest that takes into account inflation over the long term.

The idea of a natural rate of interest was first introduced by Swedish economist Knut Wicksell.  Recognized as an economist’s economist in the late 1800s and early 1900s, Wicksell is known for his macroeconomic text Interest and Prices which noted the difference between the real rate of return on capital (aka: the natural rate of interest) and the market rate of interest (aka: the rate borrowers pay). According to The Economist:

“If the financial rate is below the natural rate, businesses can reap unlimited profits by borrowing as much as they can and plowing it into high-returning projects. Eventually, though, all that additional spending pushes up prices, money and credit, and, eventually, financial interest rates.

Wicksell saw financial rates as those set by banks competing to make loans. That job is now performed by central banks. They still think in Wicksellian terms: the natural rate prevails when the economy is at full employment. Set the policy rate above the natural rate and the economy tips into depression. Set it below, and inflation results – or, some worry, speculative credit booms.”

So, where are interest rates headed? Apparently, they’re going to move higher. According to the Federal Reserve’s September 2013 economic projections, the federal funds rate (the rate at which banks lend to each other overnight) is expected to reach 2 percent by the end of 2016. Currently, it is at 0.25 percent. (The Fed also expects the United States will be close to full employment at that time with the unemployment rate nearing its long-term average of 5.2 to 5.8 percent.)

Weekly Focus – Think About It
“It has always seemed strange to me... the things we admire in men, kindness and generosity, openness, honesty, understanding and feeling, are the concomitants of failure in our system. And those traits we detest, sharpness, greed, acquisitiveness, meanness, egotism and self-interest, are the traits of success. And, while men admire the quality of the first, they love the produce of the second.”
--John Steinbeck, Pulitzer and Nobel Prize-winning American author

Market Commentary - Week of 10/21/13

The Markets
Curse of Chucky, Scream 2, Final Destination 5, Freddy vs. Jason… You know Halloween is nearly upon us when you can’t surf channels without exposing yourself to or relishing in a multitude of horror flick sequels.

Propagating alarming situations seems to be all the rage in Washington, too. Last week, a last-minute deal raised America’s debt ceiling, saving us from a debt default and ending the government shutdown – until next January. In the meantime, hoping to avoid a sequel just three months down the road, the members of Congress agreed to put their heads together and produce a 10-year budget plan by mid-December.

Like the hero or heroine of many a terror-filled fantasy, stock markets generally have proved resilient despite facing formidable challenges. Just last week, the Standard & Poor’s 500 Index hit a new all-time high. According to Barron’s:

“Since the rally began, in March 2009, there has been the flash crash, the Greek default drama, the U.S. debt-ceiling debacle, the Standard & Poor's credit-rating downgrade of the U.S., the sequester, and the great taper scare. Each of these, we were told, could have ushered in a new bear market. Instead, the S&P 500 squirmed out of the traps and headed higher. And, for its latest trick, the market had to avoid the double whammy of a government shutdown and a potential default.”

The short-term resolution of budget and debt-ceiling issues doesn’t mean markets have escaped the (choose one: axe-wielding maniac, flesh-eating demon, Stay-Puffed Marshmallow Man) quite yet. Looking ahead, they’ll have to confront the menace of potentially contentious budget negotiations, the possible end of quantitative easing, and the phantasm of resolute fiscal policy.

Data as of 10/18/13
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    2.4%    22.3%    19.7%    13.5%    13.8%    5.3%
10-year Treasury Note (Yield Only)    2.6    NA    1.8    2.5    3.9    4.4
Gold (per ounce)     4.0    -22.3    -24.5    -1.3    10.6    13.4
DJ-UBS Commodity Index    0.7    -7.5    -12.8    -4.2    -1.5    0.3
DJ Equity All REIT TR Index    3.0    8.6    9.8    12.4    14.9    9.9
Notes: S&P 500, Gold, DJ-UBS 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 TR 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.

IT MAY BE THE HOLY GRAIL OF INVESTING… If you could accurately predict how share prices would move, you’d probably be quite wealthy. If you could offer insight that helps analysts and investors do a better job predicting such things, you might win the Nobel Prize. That’s what happened last week when American economists Eugene Fama and Lars Peter Hansen from the University of Chicago, and Robert Shiller from Yale University, jointly received the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2013. They were recognized for their empirical analysis of asset prices.

Eugene Fama is best known for his work on the efficient frontier which demonstrated stock prices are extremely difficult to predict over the short term because new information is incorporated into prices very quickly. His research not only influenced future research, many credit the emergence of Index-linked investments to his theories.

Robert Shiller, a student of behavioral economics, challenged Fama’s efficient markets hypothesis with the belief that markets are driven by human psychology which can and does create large and sustained pricing errors. Shiller established when the ratio of prices to dividends for stocks is high, prices tend to fall, and when the ratio is low, prices tend to increase.

Lars Peter Hansen developed the Generalized Method of Moments, or GMM, which proposed a “straightforward way to test the specification of the proposed model… Hansen’s work is instrumental for testing the advanced versions of the propositions of Fama and Shiller… If you want to do serious analysis of whether changing risk premia can help rationalize observed asset price movements, Hansen’s contributions will prove essential.”

According to the Nobel committee, “There is no way to predict the price of stocks and bonds over the next few days or weeks. But, it is quite possible to foresee the broad course of these prices over longer periods, such as the next three to five years… The Laureates have laid the foundation for the current understanding of asset prices. It relies in part on fluctuations in risk and risk attitudes, and in part on behavioral biases and market frictions.”

Weekly Focus – Think About It
“Many men go fishing all of their lives without knowing that it is not fish they are after.”
--Henry David Thoreau, American naturalist and author

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