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

 

 

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