Wednesday, December 24, 2014

Summary of our 1Q-15 Investment Committee Meeting

We held our first quarter 2015 investment committee meeting on December 18. We continue to “stay the course” in maintaining a fairly full exposure to stocks. We believe U.S. stocks continue to offer the most attractive risk/reward among global markets. This is based on our positive outlook for the U.S. economy and corporate earnings and continued low inflation. Growth of the U.S. economy remains the strongest of the developed world economies. We expect U.S. real GDP growth in 2015 of about 3%, compared to virtually zero growth in the Eurozone. Both China and many emerging markets are experiencing slowing in growth. Relative growth of U.S. corporate earnings should remain a positive factor in 2015.

The Federal Reserve continues to remain accommodative of economic growth. While we expect the Fed to begin raising interest rates in 2015, we expect this increase will be a) later in the year and b) gradual and well telegraphed. We do not share the concerns of some that a change in Fed policy will cause a significant upset to financial markets,  particularly if inflation remains low and corporate profit growth remains sound, both of which we expect as of now.

With respect to recent stock market volatility, we note that volatility is a normal element of all financial markets. The mid-December pullback in the stock market was about 5% and well within the normal range of day-to-day, week-to-week volatility going back many years. It seemed worse because of the coincident plunge in oil prices. That said, we think the cyclical bull market is maturing and we do not expect stock market returns going forward to be as strong as the past 5-6 years. Valuation, for one thing, is now above the long-term average and will not be the tailwind it has been for the past six years. We expect market growth going forward will mostly be driven by earnings.

We spent more time this quarter in deliberating our bond investment strategy. As we’ve explained previously, the conundrum (balancing act) facing bond investors is maintaining income in a very low rate environment while protecting against capital risk associated with rising interest rates. We have implemented a structure that underweights the long end of the curve and overweights shorter duration while also holding bonds or bond substitutes (such as utility stocks) that support portfolio income. With respect to equity investments, within U.S. exposure, we increased our weightings to large and mid-cap value (higher dividend-paying) stocks and also increased exposure to real estate. We slightly reduced aggregate exposure to international stocks and held steady our exposure to commodities, primarily in the areas of energy and forest products.

Tuesday, October 7, 2014

Daily Bullets…..for October 7, 2014


·         IMF again reduces growth outlook…The International Monetary Fund today reduced its global growth outlook with most of the weakness centered in Europe, particularly Germany, Italy, and France. The announcement also had some rather alarming language pertaining to potential for a stall in the recovery, acceleration in deflationary trends, and risks of market plunge once the U.S. Federal Reserve starts raising interest rates.
What’s the point? We believe today’s announcement by the IMF is the primary factor contributing to today’s stock market weakness. As we have mentioned in previous posts, the European economy remains in a deep funk and the IMF report just confirms this. Deflation continues to be a major risk for the Eurozone economy. Japan went through a period of sustained deflation, so it can certainly happen. While Eurozone monetary policies might be highly accommodative, the mechanisms to transmit the policy to the economy (such as credit) are highly stunted to non-existent in Europe currently. A key concern for investors is renewed possibility of recession in Europe which could act as a drag on the entire global economy, and thereby slow corporate earnings growth, a key driver of stock prices. The good news is U.S. companies generally remain in excellent condition financially and are generating record levels of free cash flow. This should be an important factor in supporting U.S. stocks, along with the prospect of a strengthening U.S. dollar.

 

 

Monday, September 29, 2014

Daily Bullets……for September 29, 2014


·         Steady outlook for economy……..The latest National Association for Business Economists (NABE) forecast was released today. The results point to continued steady economic growth led primarily by business and government investment and growing export trade activity.
What’s the point? The NABE survey is a good one because it reflects the views of private sector economists at large businesses, and not Wall Street economists. This is good, in our view, because NABE economists are closer to what is really happening in the economy through their businesses. The article in the link discusses the outlook for various sectors, but a key point is there appear to be no big surprises in the general outlook, which is in line with our view: moderate real GDP growth of 2.5%-3%, with inflation of around 2% (what we’ve dubbed the “3+2” economy). In general, this scenario remains a positive backdrop for financial assets, particularly stocks, and is probably more neutral for bonds.

 
·         Evans comments assuring on Fed policy……Chicago Fed president Charles Evans spoke this morning at a meeting of economists and reiterated his belief that the Federal Reserve will remain patient and restrained in raising interest rates, even if it involves the risk of inflation running modestly above the Fed target of 2% for period.
What’s the point? We think Evans’ comments most likely reflect the current majority view of the FOMC, and echo recent comments of Fed Chairwoman Janet Yellen. While the U.S. economic growth does appear to be accelerating somewhat, as the above comments on the NABE survey indicate, moderate growth is still expected and Europe remains in a severe funk with deflationary implications. The Fed thinking is probably that the economy gives them the latitude to keep monetary policy more loose than they otherwise might at this point in an economic recovery and, in fact, this may still be of necessity. The point for financial markets is essentially “more of the same”: an accommodative Fed policy is positive for stocks, in particular. The big questions concerning investors now are “how fast does the economy accelerate?” and “to what extent does the Fed accelerate the reduction of accommodation?” Our thought is gradualistic changes in policy accomodation, which we expect, should not be overly disruptive to the financial markets. Under this scenario valuations should hold up if not increase somewhat.

Thursday, September 18, 2014

Q4 Investment Strategy Meeting: More “3+2”

We held our Q4 investment strategy meeting on September 16, 2014. The environment for the financial markets has not changed significantly since our last meeting in June and we believe the stock market outlook remains favorable for the longer term.

Economic growth in the U.S. remains steady and, while we expect the pace of growth to accelerate, we do not expect a level of growth that would cause significantly higher inflation or interest rates. The bond market has confounded predictions this year, with 10-year Treasury yields actually declining about 20% due to slower than expected growth in Europe and emerging markets and foreign capital seeking higher returns in U.S. bonds. The European economy remains weak which is contributing to slower-than-expected global growth.

Within this backdrop, we believe Federal Reserve policy will continue to remain accommodative. This was confirmed at the Fed’s recent FOMC meeting in which the Fed voted to maintain a “highly accommodative” monetary policy and reiterated its guidance to maintain very low interest rates for an extended period. Fed policy continues to be a positive for financial assets.

U.S. stocks remain in a stable uptrend. The current “3+2” environment (3% GDP growth, 2% inflation) is favorable for U.S. stocks which we believe remain positioned for further gains over the longer term. In the short term, we remain of the view that risks of a market correction are elevated due to increased bullish sentiment, narrowing breadth, and increased valuation. We have taken actions following our past two strategy meetings to hedge this risk by slightly reducing our equity exposure.

With respect to investment strategy, there were no major changes in our sector allocations following the meeting. Within equities, we slightly increased exposure to large cap stocks. Within this sector, we continue to favor quality dividend-paying stocks as well as health care and technology due to their strong secular growth prospects. Our exposure to developing equity (small and mid-cap stocks) remained essentially flat and slightly underweighted due to high relative valuations. Our exposure to international equities was reduced slightly in favor of a higher U.S. allocation, while exposure to REITs and natural resources remained virtually unchanged.

Our allocations within fixed income were essentially unchanged. We remained at the low end of our allocation with respect to long bonds as these remain most sensitive to a rise in interest rates. We increased our exposure to intermediate maturity bonds, mostly through increased utility stock exposure. Our exposure to short-term bonds remains above normal due to increased risk of an increase in interest rates or unexpected change in Federal Reserve policy.

 

Thursday, September 11, 2014

Daily Bullets…..for September 11, 2014


·        Retirement study supports slower growth…..The Federal Reserve recently issued its highly regarded triennial Survey of Consumer Finances (SCF). With respect to retirement preparedness, the picture is  troubling due to widening income gap, declining home ownership, and drawdowns or liquidations of retirement accounts among lower and mid-income categories.
What’s the point? The survey results are further confirmation of what we have been hearing for several years now: retirement savings is under pressure and general preparedness of the baby boomers for retirement is looking terrible. The economic implications of this would support the slower secular growth thesis due primarily to significantly lower discretionary income available to the boomers. While certain segments of the economy are doing OK, a large segment of society (the baby boomers) will have far less resources for discretionary spending and will likely need to rely more on government programs for support during retirement. On a macro basis, this places more pressure on the tax base to fund significant increases in entitlement spending, and reduces resources available for investment and savings and discretionary spending, which represents a significant portion of U.S. GDP. We believe these factors most likely would contribute to lower secular real growth in the range of 2-3%, compared with 1950-2000 average of about 3.5%.

 

Wednesday, September 10, 2014

Daily Bullets ….September 10, 2014


·        Fed considers change to rate guidance…News out this morning that the Federal Reserve is considering a change in the way it issues guidance on interest rate policy. The idea would be to move from guidance based on specific time periods to guidance based on economic developments or “outcomes”-based.
What’s the point? The Federal Reserve has a huge impact on the global financial markets. Its formal guidance, press releases, speeches, open market operations, and other forms of communication can have a major effect on financial market trading and financial asset valuations. We are encouraged that the Fed is grappling with the issue of improved communication on policy. Why? Because through better communications and focus on visible, understandable goals, it should help to reduce policy uncertainty in the financial markets and thereby help to reduce speculation and trading volatility. While volatility (and speculation) are normal aspects of the financial markets, we believe lower volatility around Fed policy would be a benefit to all market participants.
Link: http://www.bloomberg.com/news/2014-09-10/fed-weighs-change-to-rate-guidance-for-added-flexibility.html
 
·        Long-term care insurance, good or bad?....This article provides a very good discussion of the pros and cons of long-term care insurance. Whether it is “good or bad” for an individual or couple depends on their individual situation and goals.
What’s the point? The issue of long-term care insurance comes up often in developing financial plans for clients. Long-term care is a major consideration for most people and, of course, fraught with unknowns: “will I pay the premiums for years and never use it?” The financial planning analysis is also not easy, as it depends on a mix of the client’s goals, financial position, ability to pay, optimal use of assets, legacy issues, etc. We believe pure long-term care insurance is not only expensive but also in most cases not a good “risk-reward” proposition. That said, there are many folks who are in a position where it can improve the outcome of a financial plan and can provide peace of mind. The article discusses some of the new insurance products, such as single premium life with a long-term care rider. We believe these new products are a step in right direction and offer a better risk-reward trade off for the client.

 

 

Tuesday, September 9, 2014

Daily Bullets…..for September 9, 2014


·         Job openings at new highs…..Labor Dept out this morning with report that number of job openings at end of July were at a 13-year high and that companies have stepped up hiring to the fastest pace in seven years.
What’s the point? Obviously this is positive news for the economy and suggests the economic recovery remains on track. One problem noted is that while job openings are up 22% in the past 12 months, actual hiring is only up 8%, which suggests companies are still having problems finding workers with appropriate skills. The “skills gap” has been one of the reasons for the unusual slowness of employment growth we’ve seen in this recovery. Other reasons for slowness in jobs growth have been demographic factors, decline in labor force participation, and technology advancements which have accelerated the substitution of capital for labor.

 

·         Survey detects global gloom…..A newly published Pew Research survey of 46,000 people worldwide reflects downbeat assessment of economic prospects, with 60% of those surveyed saying their country is performing poorly.
What’s the point? Not to focus on the negative, but what is disconcerting about this survey is the pervasiveness of it across virtually all regions. The study notes that only in low-income developing economies, such as China, is there a slight majority (51%) calling economic conditions “good”. Is this a new version of a “depression”? One could call it that. The only “good news” in this is generally consumer sentiment is behind the actual curve of the economy. Our assessment is global growth will remain sub-par for the foreseeable future due to moderate growth (2-3%) in U.S., slower growth in China, and essentially no growth in Europe. The implications for investments and financial planning are: 1) continued low interest rates resulting in poor returns on bonds; 2) continued emphasis on stocks for both growth and income; 3) continued emphasis on sectors of the markets that can grow at an above average rate, such as health care, technology, and certain financial and industrial sectors.

 

 

 



Monday, September 8, 2014

Daily Bullets……for September 8, 2014


·         New Harvard survey is troubling……Article in link below discusses results of a recent survey of corporate executives who are Harvard Business School alumni, pertaining to future hiring trends and  trends in worker pay and benefits. The picture is not a happy one as over 40% of the executives surveyed expect lower pay and benefits for workers and roughly half favor outsourcing over hiring. The survey found that many companies are reluctant to add jobs if other alternative exist.
What’s the point? The results of the survey are troubling for both younger workers and for the economy overall. The implications of this, if in fact they can be extrapolated to the greater economy, are negative for personal income, savings, and consumer discretionary spending, all of which implies continued below average economic growth, low inflation, continued low interest rates, and continuation of the substitution of capital for labor, which has contributed the slowness of the current economic recovery. This would also imply a continuation of the current environment for financial assets: bonds treading water with stocks continuing to slowly grind higher, remaining attractive because of their ability to “capture” growth (through higher sales) and translating that into growing cash flows and dividends. Mediocre economic growth does not portend a robust stock environment but one in which valuations will most likely continue to edge upward along with moderate (8-10%) earnings growth.

·         Cutting health costs…..The article in link below is a good summary of several strategies people in or nearing retirement can take to reduce health care costs.
What’s the point? As financial planners, the topic of health care costs comes up frequently in dealing with clients who are currently in or nearing retirement. For many of them, health and long-term care costs can be their highest single expense and, in certain cases, can make or break a retirement. Some or the recommendations we believe are worth considering are 1) starting and contributing to an HSA and funding it to the maximum extent possible each year ($7550 for a family in which owner is over 55). Funds in an HSA can also be used tax-free to pay for Medicare parts B and D during retirement. 2) If you cannot do an HSA (you need a high-deductible health plan policy), another (less attractive) option is flexible spending account (FSA) set up through your employer. Up to $2500 per year can be contributed on a pretax (i.e. tax-free) basis and can be used to pay out-of-pocket medical expenses throughout the year, in addition to other options that might be available through the FSA, such as reimbursment for mass transit commuting expenses.

 

 

Friday, September 5, 2014

Daily Bullets…..for September 5, 2014


·         Surprising job numbers not a big deal……Labor Dept reports this morning that non-farm payrolls grew by 142k in August, much lower than expected and down 33% from July. The unemployment rate fell to 6.1%.
What’s the point? The jobs numbers are a key datapoint that investors watch to provide a gauge of the strength of the economy. Characteristics of this economic recovery have been both a) its relative weakness compared with other post WW-2 recoveries, and b) the unevenness of virtually all the data we’ve seen since 2009, whether it be job growth, capital spending, industrial output, etc. The August weakness fits in with the overall pattern of this recovery: uneven. We don’t see it as a harbinger of slower growth but rather more of the same: a moderate, uneven recovery. That said, we do expect some acceleration in economic growth from the 2% range to about 3% in 2015.

·         ECB to pump Euro economy: European Central Bank chief Mario Draghi announced this week that the ECB will implement a form of quantitative easing (QE) by purchasing up to $1 trillion in private asset-backed securities.
What’s the point? The ECB’s QE program is designed to provide additional liquidity to the Eurozone credit markets, and thereby help accelerate the economic recovery in Europe and drive inflation higher. The current state of the Eurozone economy is akin to being in the “intensive care unit”: essentially zero growth and mild deflation with a very real risk that deflation could worsen. This, of course, is Draghi’s major concern. We do not see the Eurozone condition improving any time soon, and we expect the recovery will be a very gradual process that could take many years. This has broader implications for the global economy: to the extent the Euro economy remains in a deep funk, it slows potential growth rate for other major economies, such as the U.S. and China. It also implies that both inflation and interest rates could remain low for longer than most investors now expect. This has both positive and negative implications for financial assets. On balance, it probably remains more positive for stocks than bonds. We do not expect the rate of gains in stocks going forward to be a high as we’ve experienced in the last five years, but returns for stocks could still be healthy, barring exogenous shocks.

 

 

Wednesday, September 3, 2014

Daily Bullets…..For September 3, 2014


·         Fed Beige Book implies no change in course…Federal Reserve issued its “beige book” survey today, which covers past six weeks of economic data it gathers from its 12 regions. The readings reflect an improving economic outlook.
What’s the point? The beige book survey is considered key economic data for investors because it is almost “real time”, fresh, and comes from a credible source. Today’s beige book release represents a double dose of good news. First, the data portrays an improving growth across all Fed regions; and second, growth appears to remain moderate, thereby reducing pressure on the Fed to accelerate its long-anticipated interest rate hike process. We would note that it also supports our view for a moderately improving economy, which is an optimal scenario for the stock market, a “goldilocks” environment in which growth is not too slow, and not too fast, but “just right” to support economic growth with low to moderate inflation.

·         CCRCs: Do your homework…..The article in the link below provides an excellent discussion of pitfalls and factors to be aware of when buying into a senior living community.
What’s the point? The aging of the baby boomers will significantly increase demand for senior living facilities (SLF). A popular form of SLF currently is known as “continuing care retirement communities” or CCRCs. This is form of SLF which provides residential alternatives under one contract that cover client living needs as their level of care changes. These can be an excellent option for many seniors. We have a number of clients who have chosen CCRCs as their form of residence. The article points out a number of factors to consider when contemplating this form of living. A few of the key points we believe are most important: do a comprehensive due diligence, which involves understanding the CCRC’s financial condition and the track record of its operator, talking with current residents, and fully understanding in what ways one’s deposit can be accessed by the operator. Also the fee structure for CCRCs differs from one facility to another. Be sure to understand what all the fees are, such as entrance or buy-in fee, service fees, monthly fees, and other fees, and how these are charged and under what conditions the fees can be increased. Annual increases of 3-5% are about the norm. The process of considering a  senior living facility can be daunting. If one is totally overwhelmed by the process, consider talking with a financial or senior care advisor who has experience in helping people transition to this type of living arrangement.

 

 

Tuesday, September 2, 2014

Daily Bullets……for September 2, 2014


·         S&P at 3000…Morgan Stanley is out today with an analysis that discusses the feasibility of the stock market (measured by the S&P500) being up an additional 50% over the next five years based primarily on an elongated economic cycle that provides the fuel for an extended corporate earnings growth cycle. More details are available in the article.
What’s the point? This is an interesting analysis by M-S. We agree with them that this could be an elongated economic recovery because of 1) high level of central bank stimulus and 2) “restructuring” of consumer balance sheets since 2009 that has reduced imbalances, such as leverage. Also, the average post-WW2 economic recovery is about 5 years, so there are precedents for long recoveries, 1992-2000 being one such example. While the M-S forecast appears plausible, we note that no one can forecast the future; all we can do is make assessments of probabilities of various outcomes. For this reason, as financial planners, we believe it is important to diversify one’s investments across several asset classes which helps to reduce portfolio volatility and act as a hedge against unforeseen market turbulence.

·         Construction and manufacturing data strong….Two reports out this morning bolster the case for improving economic growth: ISM manufacturing activity index for August rose to its highest level in over three years; and construction spending increased to its highest level since 2008.
What’s the point? Economic data for the past 3-4 months portrays an improving economy, which is what we had anticipated earlier this year. What is driving this? Several factors: gradual improvement in employment growth albeit far from levels of previous recoveries; steady growth in business investment spending; low interest rates due to Federal Reserve policies; and improvement in consumer financial conditions. We expect these conditions to continue for the foreseeable future, which supports our outlook for improving growth in both the economy and corporate profits. These conditions along with moderate inflation are positive for the financial markets, particularly stocks. We continue to believe the largest risks now are exogenous, such as geopolitical events or unexpected weakness in European or Chinese economies.

 

 

Friday, August 29, 2014

Daily Bullets…..for August 29, 2014


·         “U.S. way outperforming rest of the world”…..This is a quote from a Wall Street “expert” supporting the view for a continuation of the bull market based on strong fundamentals including strong U.S. corporate earnings growth and accelerating economic growth.
What’s the point? The article in the link below provides some interesting commentary from several Wall Street strategists discussing the current surprising strength of the stock market of late. One trader states that if the market stays strong for a few more days he will “throw in the towel” on his call for a correction. Why even talk about this stuff? It points up the difficulty (and futility) of trying to forecast the market, particularly in the short term. In our latest quarterly strategy, we slightly reduced our exposure to equities as a measure of risk management. We too share some concerns, primarily around geopolitical factors, such as Ukraine and ISIS. As the one trader comments in the article (Mr. Iuorio), a market correction will probably “blindside” investors. They usually do. As financial planners, we believe it is important to protect against market uncertainty by investing in a diversified portfolio that includes multiple asset classes. This helps to reduce portfolio volatility and helps in delivering improved risk-adjusted return, which we believe is the most relevant indicator of performance in prudent wealth management.

·         Brazil in recession…We note with interest that one of the supposedly strong Latin American economies, Brazil, has officially entered a recession (see article for more information).
What’s the point? The point here is that global economic growth continues to remain fairly weak. The Euro economies remain mired in virtually zero growth and Latin American economies have experienced a significant slowdown. China appears to be on a slower “glide path” to 5-6% growth. All this continues to support the outlook for subdued global growth with the U.S. now being one of the strongest economies. The collateral implications of this would appear to support continued accommodative central bank policies, continued low interest rates, more capital seeking higher returns in higher risk assets such as stocks and real estate, and more capital flowing into U.S. markets. The fact the U.S. corporations are cash flush and can enhance shareholder return through both dividend increases and M&A, makes U.S. stocks relatively more attractive, and is another factor that supports demand for and valuations of U.S. stocks. We think the biggest risks now remain exogenous geopolitical events or some dramatic hiccup in either the Eurozone or Chinese economies.

 

 

Thursday, August 28, 2014

Daily Bullets…..for August 28, 2014


·         “Unretirement”….what if you can’t do it? The article below discusses going back to work after retirement as a way to improve one’s probability of success in retirement (i.e. maintaining a relatively consistent living standard after one retires).
What’s the point? The article makes some interesting points and, as financial planners, we agree this is a good option for many individuals. However, it’s a little unrealistic in that many people will not be in a position to “go back to work” after they retire for a variety of reasons. There a number of things we feel as planners that people can do if they are concerned about their preparedness for retirement. Here are a few. Try to anticipate and head off financial problems before retirement. This involves careful assessment of assets, income sources and living expenses at least several  years before retirement. Increase expense budget discipline and seek ways to reduce costs, particularly large fixed costs. Analyze your social security options to maximize this income source. If you own a home, a reverse mortgage can be an option, albeit expensive, to extract cash that can be invested to supplement retirement income. Also, taking on or increasing a mortgage can, in certain cases, help improve one’s chances of success in retirement if the capital is invested appropriately. Restructuring one’s investments to generate more income is an option to supplement income. Annuities, in certain cases, are also an option, however, they are a very expensive way to generate income, and a measure we would consider more of a “last resort” option. If one is uncomfortable or highly uncertain about facing this or working through the process, a  trusted advisor or financial planner is also a good way to get help with this process.

·         Q2 GDP revised up…….Commerce Dept. this morning issued upwardly revised estimate of
Q2 GDP growth of 4.2%. This is above expectations of 3.9%. Many indicators of the economy’s health were looking strong in Q2, including business and consumer spending, domestic demand, and domestic income.
What’s the point? Another in a continuing string of data over the past several months indicates the U.S. economy continues to gain momentum and strength. It is positive for corporate profit growth, which is a key driver of stock prices. A concern for investors is whether stronger growth causes the Fed to accelerate the timing of its interest rate increase. Based on recent comments by Janet Yellen, Fed Chairwoman, it does not appear the Fed will move to accelerate its interest rate increases. While market valuation can no longer be considered “cheap” on an absolute P/E basis, it remains cheap relative to bonds; and even when the Fed begins to raise rates, raising Fed fund to the 1-2% level would still be very low from an historical perspective (some may even call it “accommodative”). Therefore, as of now, we are not overly concerned that accelerating economic growth will result in an unexpected acceleration in Fed interest rate increases. Of course, this bears watching, and one concern we do have is the fact that there has not been a market correction in nearly three years. As always, September and October should be interesting months.

 

 

 

Friday, August 22, 2014

Daily Bullets…..for August 22, 2014


·         Yellen pretty much as expected….Federal Reserve Chairwomen Janet Yellen delivered a speech today at the annual monetary policy summit at Jackson Hole, WY. Cutting through the rhetoric, Yellen essentially reiterated and supported her position that there remains a high degree of slack in the U.S. labor market, therefore justifying the Fed’s current low interest rate policy.
 
What’s the point? The annual Jackson Hole speech by the Federal Reserve chief is always a much anticipated event. Yellen’s speech today was of heightened interest due to the focus on timing of Fed rate increases. We think Yellen’s comments may have been confusing for some investors. While paying “lip service” to the various academic arguments and pros and cons of Fed policy, ultimately Yellen came down on the side of continuation of current policy due to what she believes is continued slack in the labor market, commenting that headline unemployment rate is not the sole determinant of Fed policy. This is pretty much as we expected and we believe bodes for similar accomodative monetary policy conditions. We expect this policy is supportive of higher valuations for financial assets. At this point, stocks continue to be more favorably valued particularly when compared on a relative basis to bond valuations. When does this environment get interrupted? Aside from an exogenous shock, it would probably be an unexpected acceleration in the economy that causes the markets to believe the Fed has to change course abruptly. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140822&id=17877738

 

 

Thursday, August 21, 2014

Daily Bullets….for August 21, 2014


·         Yellen won’t be a surprise…..Fed Chairwoman Janet Yellen is scheduled to give a speech on Friday at the annual Jackson Hole annual monetary symposium. Anticipation of her comments is having an impact on trading activity this week.
What’s the point? This is mostly noise. Sure, there is valid reason to be interested in Yellen’s comments; however, given recent economic data for both the U.S. and overseas, we think the Fed (and Yellen) will not change their overall posture very much and therefore, we think Yellen’s comments will continue to be “dovish”. As we’ve said in recent posts, the character of the U.S. labor market remains problematic due to high long-term unemployment, labor force underutilization, and virtually zero real wage growth. This continues to be a major concern for Yellen, which we expect will be reiterated in her speech on Friday. Other FOMC committee members (particularly Plosser) have voiced concerns recently about rates remaining too low, however we think the structural issues of the labor market will continue to cause the Yellen to reiterate the dovish position. Implication: no significant change for the stock and bond markets, i.e. continued accommodative policy favoring financial assets. Link: http://money.msn.com/business-news/article.aspx?feed=BLOOM&date=20140820&id=17871717

·         Retirement catastrophe……This article discusses aspect of what many folks fear on a daily basis: either not having enough savings for retirement or running out of money because of an unexpected financial burden, such as a major medical issue.
What’s the point? All of the suggestions discussed in this article are reasonable. However, all of these items need to be considered in the context for each person’s situation. Decisions made about continuing to own your home, downsizing, assessing probability of major medical expenses, potential changes in social security, estate planning, retirement goals, etc, all require careful consideration, assessment of uncertain outcomes, and making probabilistic judgments. These can sometimes be overwhelming. One of the ways to improve one’s decision and planning process is to engage a financial professional who has experience in understanding the complexities of these decisions and developing a financial plan and investment program that will improve one’s probability of achieving their retirement goals. Financial planning software available today has significant power in handling multivariate decision-making under uncertainty and in modeling multiple potential outcomes (scenario analysis). The process of developing a financial plan can go a long way to relieving anxieties about retirement and thereby improve overall quality of life. Link: http://money.msn.com/retirement/how-to-deal-with-a-retirement-catastrophe

 

 

 

Tuesday, August 19, 2014

Daily Bullets……for August 19, 2014


·        “A million miles from full employment”…..This article focuses on the fact that real (inflation-adjusted) wage growth has been virtually zero during this economic recovery and the worst wage performance of any recovery since WW2. The quote is from a Dartmouth econ prof commenting on the fact that while the highest 20% of income earners have seen growth in income(partly through holding stocks with rising dividends), the bottom 20% have actually experienced a decline in wages.
What’s the point? It has been evident for years that wage growth during this recovery has been very weak. This is contributing to the sluggishness of the current economic recovery. The Federal Reserve has made wage growth a key indicator for setting monetary policy. The irony is, to the extent the Fed keys on this, it implies continued accommodative monetary policy and low interest rates for a very long time. Why? Because we believe there is little pressure for an acceleration in real wage growth any time soon. To the extent wage growth remains subdued and interest rates remain low (which we expect), it perpetuates an environment of “income austerity” which, in part, is driving dividend-paying stocks higher as investors seek income and rising dividends. We expect this to continue for the foreseeable future. Link: http://money.msn.com/business-news/article.aspx?feed=BLOOM&date=20140819&id=17868477

·        Subdued inflation continues…..Labor Dept reported CPI for July, which was again a subdued number. Headline inflation of 2.0% remains in line with trend rate of the past several years. “Core” CPI came in at 0.1% m/m and 1.9% y/y, which is below the Fed’s target range of 2-2.5%.
What’s the point? This is another subdued reading and indicates inflationary pressures in the economy continue to remain muted. It correlates with our comments above pertaining to wage pressures. We believe the overall inflation environment and subdued wage growth is not conducive to major changes in Federal Reserve policy. We believe the implications of this are favorable to both bonds and stocks, but more so for stocks because of moderate valuations and ability for stocks to raise dividends (income to investors). To the extent companies can capture growth through rising sales and earnings, and pass this on in the form of dividends, we believe it will continue to favor stocks over bonds. While stocks appear to be fairly valued on the basis of absolute measures (price-to-earnings), they remain quite undervalued relative to bonds and current bond yields, an important aspect of the current environment, and another reason why stocks could continue to surprise to the upside despite concerns over valuation (which we share). Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140819&id=17867963

 

 

Monday, August 18, 2014

Daily Bullets…….For August 18, 2014


·         Prognosticating a “risky” endeavor….The article in the link below provides some interesting insights into the current stock market outlook of several strategists. One interesting point is the concern that slowing earnings growth will result in lower stock market returns over the next several years.
What’s the point? The discussion, while interesting, is somewhat humorous in the sense that these people think they can actually forecast something. As a counterpoint to the earnings argument, there are a number of reasons aside from earnings that could cause the market to continue to rise at or near the longer-term secular rate of around 10% for the next couple of years (rising valuations being one of those reasons). The broader point with respect to financial planning is a) forecasting or timing the stock market is difficult if not impossible; 2) investors (including our clients) are much better served by not worrying about market gyrations and investing in a broadly diversified portfolio of investments allocated among multiple asset classes. A diversified portfolio provides for capturing growth among several asset classes, but as importantly, improves ability to achieve higher risk-adjusted returns by reducing portfolio volatility. As fiduciaries, we believe appropriate risk-adjusted return is arguably the most important measure of investment return in responsible wealth management. Link: http://money.msn.com/business-news/article.aspx?feed=BLOOM&date=20140818&id=17865313

·         Looking at “worst case” scenarios……There a lots of good articles available on retirement planning. The link below references an article that discusses several aspects of financial planning including “worst case” planning.
What’s the point? There a lot of factors that go into retirement and estate planning. This article makes some very good points regarding self sufficiency, legacy (estate planning), and worst-case planning. A lot of people try to “go it alone”, without any background in investments or financial planning. In most cases, this is not a good idea. One key benefit of developing a financial plan with a professional advisor is the ability to analyze multiple scenarios, including “worst case” planning. The advanced tools and software that professional planners have available today provide excellent forecasting and analysis capabilities that provide greater clarity and improved decision-making. This is important in not only improved future planning, but helps to reduce the probability of costly financial mistakes while reducing anxiety about financial matters and improving one’s quality of life. Link: http://money.msn.com/retirement-plan/6-key-retirement-planning-steps

 

 

 

Monday, August 11, 2014

Daily Bullets …..for August 11, 2014


·         Low wage growth contributing to slow economic recovery…..U.S. Conference of Mayors released results of a survey today that shows wage levels for  jobs created in this recovery are 23% below wage levels of the jobs that were lost in the Great Recession.
What’s the point? Although we have some question about this data and how the results were compiled, this information, if credible, would be another of several reasons why this economic recovery has been the slowest since WW2. There are a number of factors we think may be contributing to this trend such as increased foreign competition, advancements in technology, slower pace of hiring by corporations, demographics, and types of new jobs being created. This trend, should it continue, would most likely continue to support the outlook for moderate economic growth (2-2.5%), restrained growth in consumer discretionary spending, and low inflation. The investment implications of this are most likely that “income”-oriented stocks (quality dividend stocks) should continue to do well, but also that it is important to hold a diversified portfolio with exposure to higher growth areas of the world, such as emerging markets, and select sectors that can grow faster than the overall economy, such as technology and health care. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&Date=20140811&ID=17849810&topic=TOPIC_ECONOMIC_INDICATORS&isub=3

 

 

 

Friday, August 8, 2014

Daily Bullets….For August 8, 2014


·         Bummed out boomers…..This article points out the current low confidence among many segments of U.S. society about the outlook for prosperity and growth. The pessimism is particularly acute now among baby boomers who, having lived through the greatest period of economic prosperity in the country’s history (1950-2000), now believe growth and economic opportunities will be more muted in the future.
What’s the point? To a certain degree, we think the boomer’s more dour outlook is justified. The post-WW2 era, in which the U.S. dominated the globe both militarily and economically, provided an era of unprecedented prosperity. Greater foreign competition and (ironically) significant technology advancements are now contributing to more muted job growth. Another key reason for boomer’s angst: many, if not most, boomers did not adequately save for retirement due to a “live for today” mentality. From a financial planning perspective, this was a huge mistake. Regular and disciplined savings is critical to achieving a successful retirement. Equally important is the manner in which those savings are invested. As financial planners, we recommend investing in a diversified portfolio that includes multiple asset classes, such as stocks, bonds, commodities, natural resources, and international equities. This approach provides the exposure for growth while providing lower volatility due to the asset diversification. Diversified portfolios provide better risk-adjusted returns over the long term, when compared to all equity portfolios, because of varying correlations among asset classes held in the portfolio. Link: http://finance.yahoo.com/news/grumpy-old-boomers-are-a-big-drag-on-america-s-economic-mood-161020535.html

 

 

Thursday, August 7, 2014

Daily Bullets………..For August 7, 2014


·         Fed study shows consumer stress…..A new study issued today by the Federal Reserve portrays a large number of Americans are still under considerable financial stress five years into the recovery from the Great Recession. One third of the respondents said they were “worse off” or “much worse off” financially than five years ago.
What’s the point? The study supports the view that a significant portion of Americans have not recovered from the Great Recession. This has obvious negative implications for consumer spending (which has been reflected in recent weak results for many retailers). The results of the study would appear to lend further support to the Fed’s position of maintaining a very low interest rate policy well into next year. The implications for financial markets would seem to support more of the same, i.e., a low interest rate environment should continue to support higher stock prices, particularly for quality companies that generate significant free cash flow and have the ability to raise dividends. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&Date=20140807&ID=17842889&topic=TOPIC_ECONOMIC_INDICATORS&isub=3

·         Unemployment applications fell again…..Weekly unemployment applications fell 14,000 to 289,000. It is another in a continuing string of data that shows steady, gradual improvement in the labor market.
What’s the point? A continued gradual improvement in employment conditions is important to continuation of the economic recovery. Because this recovery has been so gradual, we think it can last quite a long time and could well rival the 1990s economic expansion which lasted nine years. With respect to investment markets, a sustained economic recovery would most likely be positive for corporate earnings, which are the key driver of stock prices. As of now, we don’t see Federal Reserve policy or inflation as being factors that would cause a major disruption in either valuations or the longer-term trend in stock prices, which we believe is upwards. The biggest risks currently appear to be more of the exogenous or geopolitical variety. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140807&id=17841781

 

Friday, August 1, 2014

Daily Bullets……for August 1, 2014


·         “Scare” in wage growth…The Labor Dept Employment Cost Index (ECI) came in yesterday higher than expected at 0.7%, the largest gain since 3Q-2008 (click link for full article). This is one of the factors contributing to yesterday’s 2% decline in the stock market.
What’s the point? There has been consternation of late among investors regarding the potential for wage pressures, particularly in areas which require certain technical skills. We do not believe wage pressures in a few industries should lead to wide scale inflation throughout the economy. Obviously, the wage data will have to be watched; however, from a broader inflation perspective, we believe there are still many forces that should keep inflation from accelerating rapidly. These forces include demographic trends, global competition, technology (substitution of capital for labor), low monetary velocity, restrained credit, labor market imbalances, continued de-leveraging global economy. All of these factors, we believe, are still well entrenched, and should help to offset wage pressures or concerns over the inflationary implications of recent Federal Reserve policy. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140731&id=17822471

·         Demographics affecting wage gains….Employment growth this morning was a perfunctory 209,000, below expectations and about in line with the average of the past year. 32% of the jobs were in low wage sectors. The unemployment rate actually rose to 6.2%.
What’s the point? Today’s employment report reflects “more of the same” and allays some of the fear created by yesterday’s jump in the Employment Cost Index (ECI). The July data indicate employment growth remains in line with its moderate growth trend. Of greater concern (see article) is the fact that low wage jobs continue to represent a significant portion of new jobs and even in traditionally higher paying industries, wage gains remain scant and job mobility is low. Millennials are also having a difficult time as a group finding gainful employment and account for a large portion of people who have dropped out of the labor force. None of this data support wide-scale wage pressures. These are also some of the key factors causing the Federal Reserve to maintain its current [accommodative] monetary policy. Moreover, the data would suggest yesterday’s market swoon in response the ECI was probably an overreaction. Link: http://finance.yahoo.com/news/baby-boomers-at-work-while-millennials-sit-out-of-job-force-163454443.html