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.

Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140929&id=17967495

 

·         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.

Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140929&id=17968890

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.

 

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%.

Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140911&id=17925601

 

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.

Link: http://www.usatoday.com/story/money/columnist/brooks/2014/09/09/retire-long-term-care-insurance-baby-boomer/14968081/

 

 

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.

Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140909&id=17917584

 

·         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.

Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140909&id=17917751

 

 

 

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.

Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140908&id=17911988

·         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.

Link: http://money.msn.com/health-and-life-insurance/11-tax-smart-ways-to-cut-health-costs

 

 

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.

Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140905&id=17908118

·         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.

Link: http://www.bloomberg.com/news/2014-09-04/draghi-sees-almost-1-trillion-stimulus-with-no-qe-fight.html

 

 

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.

Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140903&id=17903054

·         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.

Link: http://money.msn.com/retirement/the-financial-risks-of-retirement-communities

 

 

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.

Link: http://money.msn.com/business-news/article.aspx?feed=BLOOM&date=20140902&id=17897698

·         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.

Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140902&id=17897832