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.

Link: http://finance.yahoo.com/news/real-stock-correction-going-blindside-135557230.html

·         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.

Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140829&id=17893456

 

 

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.

Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140828&id=17890081

·         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.

Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140828&id=17890191

 

 

 

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

 

 

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

 

 

 

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

 

 

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

 

 

 

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

 

 

 

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

 

 

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

 

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