Will Congress pass it? What difference could it potentially make?

On September 8, President Obama announced a new plan to improve the economy – the $447 billion American Jobs Act, a sequel of sorts to his past economic stimulus proposals. His announced goal: job creation without new taxation.

While the President took some sharp jabs at Republicans in his speech to Congress

(“I know that some of you have sworn oaths to never raise any taxes on anyone for as long as you live”), early indications are that the bill will have noticeable bipartisan support.¹

What’s in this bill? The AJA would try to boost the economy through seven different tactics – extensions and expansions of tax breaks, and infusions of federal dollars.

1. The current payroll tax holiday would be extended through the end of 2012.
2. The payroll tax (Social Security) would fall to 3.1% - not only for workers, but also for businesses with payrolls of $5 million or less.
3. Companies could get a tax credit as large as $4,000 for hiring the long-term unemployed (people who have been out of work for at least 6 months).
4. Long-term jobless benefits would again be extended.
5. $80 billion of federal money would be assigned to new infrastructure projects (highways, bridges and schools).
6. Businesses could expense 100% of their investments in 2012, just as they have been able to do in 2011.
7. Additional federal money would be given to struggling state and local governments to help them avoid layoffs of first responders and teachers.^2,3

How could this all be funded without new taxes? President Obama claims the effort can be paid for as a byproduct of his plan to reduce the federal deficit (a plan he will discuss in greater detail in a September 19 speech).^1,4

The bill isn’t set in stone yet. The AJA goes to the House for a vote this week, and though the House Republican leadership likes the essence of the plan, it may seek major alterations.

In a jointly authored statement issued on September 9, House Speaker John Boehner (R-OH), House Majority Leader Eric Cantor (R-VA), Majority Whip Kevin McCarthy (R-CA) and Conference Chairman Jeb Hensarling (R-TX) said the plan “merits consideration”, but they also hoped that the President’s ideas were not offered “as an all-or-nothing proposition, but rather in anticipation that the Congress may also have equally as effective proposals to offer for consideration.”⁴

Indeed, Republicans have had an alternative plan in the works for a while - the so-called Plan for America’s Job Creators - which centers on tax reduction, decreased non-defense discretionary spending and less costly industry regulations to stimulate private-sector job growth. There isn’t much support for it among Democrats.

What do economists think the AJA could accomplish? Some think the economy would get some short-term relief if it became law. Others see an upcoming object lesson in failed Keynesian economics.

• Moody’s Analytics chief economist Mark Zandi is big on the bill – he believes it could add 2% to GDP, cut 1% off the jobless rate, and create 1.9 million jobs in an economy “on the edge of recession”.
• University of Pennsylvania Wharton School of Business professor Susan Wachter thinks the payroll tax reductions alone could generate 1 million jobs and expand the economy by 1%.
• At Pimco, Mohamed El-Erian calls it a “credible program that is focused on the right structural areas.”
• Unicredit’s Harm Bandholz thinks the AJA could “add up to 2 percentage points to growth in the coming year.”
• “Bottom line: not a lot of bang for the buck here,” states Tom Porcelli of RBC Capital Markets, who feels that the economic impact of the infrastructure investments will likely be “fairly modest … the red tape and politics involved in allocating these funds makes the implementation a long and drawn-out process.”
• The Heritage Foundation’s J.D. Foster sees “a bunch of retread policy ideas that two years after they were first tried managed to create an arithmetic novelty – exactly zero job growth in August. In total, the President is calling for more new spending on proven policies that are proven failures.”^5,6
  

As the economy is in such a low gear, you may see Democrats and Republicans support the bill with newfound unity or at least tolerance. While America can’t reach across the Atlantic and fix the Eurozone crisis hampering world stocks, this envisioned stimulus could help our economy make some small strides.

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Citations.

www.marketinglibrbary.net

1 - advisorone.com/2011/09/09/obama-chides-congress-as-he-urges-passage-of-jobs [9/9/11]

2 - montoyaregistry.com/Financial-Market.aspx?financial-market=maxxing-out-your-ira&category=1 [9/9/11]

3 - money.msn.com/business-news/article.aspx?feed=AP&date=20110909&id=14243169 [9/9/11]

4 - latimes.com/news/politics/la-pn-house-jobs-plan-20110909,0,2297315.story [9/9/11]

5 - usatoday.com/money/economy/story/2011-09-09/obama-jobs-plan-economists/50336434/1 [9/9/11]               

6 - blogs.wsj.com/economics/2011/09/09/more-economists-react-gauging-impact-of-obama-jobs-proposal/ [9/9/11]           

6 - blogs.wsj.com/economics/2011/09/09/more-economists-react-gauging-impact-of-obama-jobs-proposal/ [9/9/11]         

Will stocks manage to stabilize before summer ends?

August 24, 2011

August 2011 is on pace to become the roughest and most volatile month for the stock market in almost three years. Where exactly will this correction bottom out? How long will buyers stay on the sidelines?

Two crucial questions await answers – but before turning to those questions, consider the developments that really hurt equities in the middle of August.

Morgan Stanley and JPMorgan Chase forecasts depressed investors. On August 18, Morgan Stanley said it had cut its global growth forecasts, citing “policy errors” on the part of the U.S. and European Union. It now anticipates global growth of 3.9% for 2011 (down from the previous estimate of 4.2%) and it sees the global economy expanding by 3.8% in 2012 (down from its previous forecast of 4.5%). JPMorgan Chase revised its 4Q 2011 U.S. GDP projection down to 1.0% from the previous 2.5% on August 19; on the same day, Goldman Sachs cut its 4Q GDP prediction to 1.5%.^1,2,3

Morgan Stanley stated that America and Europe could slide into a recession in 6-12 months – not one as severe as the downturn of 2007-09 given that many household, corporate and bank balance sheets are healthier today, but a recession nevertheless.¹

The EU’s latest attempt to curb sovereign debt looked weak. On August 16, German chancellor Angela Merkel and French president Nicolas Sarkozy offered three new measures to address the European Union’s debt crises. They proposed requiring all 17 EU nations to craft and pass constitutional amendments requiring balanced budgets. They also mentioned enacting an EU-wide tax on financial transactions in 2012, and creating a new joint-governance council that would convene every 6 months to assess and plan to fine-tune the EU economy.^4,5

This was not what Wall Street wanted to hear. The proposals seemed inadequate to many analysts. Rather than revising the business model of the European Union, Merkel and Sarkozy reaffirmed a commitment to the euro and implied that the biggest EU economies (read: Germany and France) would be taking the hit for the mistakes of their poorer, more indebted brethren. As some of these proposed measures will have to be approved by popular vote in Germany and France, who knows if they will be adopted.⁴

If stocks are to rebound in the near term, the answers to two major questions will both have to be “yes”.

Q: Can the EU make decisive moves to combat its debt crises? Wall Street (and many economists) would like to see the EU create a “Eurobond” – a euro-denominated debt security backed by the EU as a whole. An EU-wide debt security could result in lower interest rates in the most debt-plagued EU nations. (Bond yields vary widely from nation to nation in the EU at present.)⁶

The EU could make another strong move by bolstering its euro stability fund. At present, Sarkozy and Merkel believe that the fund’s 440-billion-euro balance is acceptable, and they do not think that a Eurobond would be the silver bullet to solve the crisis.⁴

Q: Can American consumers keep spending? We can’t predict the future, but the July retail sales figures from the Census Bureau are encouraging. Overall retail sales were up 0.5% in that month, more than double the increase economists widely forecast. There were notable monthly gains in auto and auto parts sales (+0.4%), electronics and appliance sales (+1.4%), clothing store sales (+0.5%), furniture sales (+0.5%) and online retail purchases (+0.9%). So we are seeing some good signals in terms of the more discretionary kinds of spending, in addition to the 0.5% July increases in spending on food and the 1.7% advance in retail gasoline sales. Factor in the pullback in gasoline prices we’ve seen recently, and consumers might have even more money for discretionary purchases in August.⁷

Regardless of the near-term answers, exiting stocks might not be wise. While past performance says nothing of future results, a newly released Fidelity study really illustrates the merits of perseverance. Fidelity looked at 7.1 million 401(k) accounts within its employer-sponsored retirement savings plans to compare returns for investors between October 1, 2008 and July 1, 2011. It found that plan participants who set equity allocations to 0% sometime between October 1, 2008 and March 31, 2009 have seen account balances increase an average of 2% since that decision, while investors who simply left asset allocations in stocks unchanged during those 6 months saw their account balances rise by an average of 50%.⁸

Many market bears thought it would take years for Wall Street to recover from that downturn, and some thought the post-Lehman “new normal” would be a Dow in the 8000s – or the 4000s. Then the gloom lifted, earnings and indicators improved and stocks took off.

There’s an old saying that you don’t want to miss the best market days. While there’s no telling if those days are weeks, months or years away, investors who stay in stocks have a chance to capture their potential.

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

“We can’t quite decide if the world is growing worse, or if the reporters are just working harder.”

-          The Houghton Line, November 1965

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Citations.

Marketing librbary.net

1 - money.cnn.com/2011/08/18/news/international/markets_morgan_stanley/index.htm?iid=EL [8/18/11]      

2 - money.cnn.com/2011/08/19/markets/markets_newyork/index.htm [8/19/09]  

3 – cnbc.com/id/44210055 [8/19/09] 

4 - money.cnn.com/2011/08/19/news/international/european_union_debt_crisis/index.htm?iid=Lead [8/19/09]          

5 - reuters.com/article/2011/08/16/eurozone-francogerman-idUSLDE77F12B20110816 [8/16/09]         

6 - money.cnn.com/2011/08/16/markets/thebuzz/index.htm?iid=EL [8/16/11]       

7 - zacks.com/stock/news/58936/Reports+of+the+Consumer%27s+Death+Are+Greatly+Exaggerated [8/12/11]

8 - cnbc.com/id/44204393 [8/19/11]

9 - montoyaregistry.com/Financial-Market.aspx?financial-market=the-financial-security-rulebook-5-crucial-steps&category=3 [8/19/11]

August 22, 2011

Two weeks ago, the markets were rocked by the Standard & Poors ratings downgrade of longer-term U.S. Treasury securities. This past week, it was problems with European debt.

It's not immediately obvious, even for financial professionals, why U.S. stocks should suffer because Greece or Italy have trouble paying their debt obligations. But in a recent posting, Mohamed El-Erian, who serves as co-CEO of PIMCO, the world's largest bond management company, made an interesting analogy that helps to make the situation a bit clearer.

His analogy suggests that we think of the European Central Bank as a Coast Guard cutter in the Mediterranean, and it gets a warning that a relatively small cruise ship called Greece is in trouble. The ship passed through a significant storm called 2008, and now, through poor planning, has run out of food and fuel and is in danger of sinking. True to its mission, the Coast Guard cutter sets out to tow the battered ship back to shore.

But then the rescue ship receives another message. A somewhat larger cruise ship is also in trouble, as a result of the same storm. Another call comes in, another ship is foundering. And then one of the larger vessels, called Italy, announces that it is in trouble as well.

What to do? Nobody prepared for the possibility that more than one ship would be in danger at once, much less four or five. The Coast Guard vessel can think of only one thing to do; it radios the two largest cruise ships in the Mediterranean, called Germany and France, and asks them to participate in the rescue operation, by cutting short their trips, sharing the food and fuel that was set aside for their passengers, and basically rescue the cruise ship business before too many future passengers become disenchanted and cancel their tickets.

The captain and the cruise ship lines (the leaders of France and Germany) are willing to help out, but the passengers are extremely restless. Why should their trip be sacrificed? Why should the food they paid for be shared with the passengers of less stable or thrifty cruise lines? The captains of the France and Germany cruise ships are afraid their passengers will mutiny if they execute a rescue, and afraid of the consequences if there is no rescue and one of the smaller cruise ships goes down with passengers and crew.

The world, of course, is watching. The overwhelming hope is that the larger ships will come and save the day. The fear is that they may not. Meanwhile, El-Erian says, the crew of the struggling rescue vessel is struggling with a once-unthinkable decision: should they throw somebody overboard to lighten the vessel and save the rest of the passengers?

This, El-Erian says, is the European Central Bank's situation today. And if we have learned anything since 2008, it is that in such a highly-connected global economy, if one major entity is allowed to go under the waves (think Lehman Brothers), the entire global system will be negatively affected. Hence, investors sell stocks in fear of another 4th quarter of 2008.

How likely is that? El-Erian points out that there are three possible endgames to the European Sovereign debt crisis. One is a disorderly breakup of the eurozone, which would mean temporary economic chaos. This could happen if the countries with the most debt problems--Greece, Ireland, Portugal, Iceland, Spain and Italy--fail to address their fiscal balance sheets due to pressure from their voters. To return to the cruise ship analogy, the people aboard the vessel named Greece believed that they paid for an appropriate ticket, and now the captain is telling them that they will have to sacrifice their vacation and pay back the Coast Guard and the other cruise ships. The response, for some, has been rioting.

A second possibility is a tighter fiscal union among the European countries, which basically means that Germany (and, to a lesser extent, France) reaches into its pocket and bails out the debtor nations to the south. In return, Germany gets more control over the economic governance of the other members of the European Union. The slogan of this approach: never again will we float unsafe vessels.

And the third? Several economists, El-Erian says, have floated the idea that two or three "peripheral economies" (Greece and Italy) would take a sabbatical from the euro. They would go back to their own currencies, which would allow them to devalue immediately, making their exports more competitive and their debt less costly. Instead of imposing an unpopular new tax on the population, the countries would impose a stealth tax in the form of higher inflation. Meanwhile, the euro becomes stronger. The motto: fix your own vessels, and then come back to see us when you're finished.

As one of these scenarios plays out, it might become obvious that many American and European stocks are currently being affected more by anxiety and uncertainty than by any direct connection with the Euro's woes. A report recently noted that Apple Computer was worth more than all 32 of Europe's largest banks. If chaos reigns across the Atlantic, there could be a flood of capital looking for a safe, liquid home in the U.S. stock market.

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

“Blessed are the young, for they shall inherit the National Debt”

-          Attributed to Herbert Hoover

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Source:

BobVeres.com

http://www.project-syndicate.org/commentary/elerian8/English

http://www.cultofmac.com/apple-was-worth-more-than-all-the-banks-in-europe-earlier-today/109642
 

August 12, 2011

This is the time of year when people go to amusement parks. Well, for the record, I do not ride roller coasters anymore, and I do not like the ride the markets are taking us on these days (weeks, months). 

Take a look at these numbers as of close of business on 8/10/2011 for the Dow:

• 8/10 Down 519.83 points or 4.62%
• Down 11 of last 14 trading days
• 3 consecutive days of 400+ point moves
• The Dow Jones Industrial Average dropped 1.17% (127 points) in the last 30 minutes of trading on 8/10
• Lowest close since 9/23/10
• Down 3444 points or 24.3% since its record close of 14,164 on 10/09/2007
• Year to date: down 7.41%
  

These are some of the questions and issues the markets are dealing with:

• A dysfunctional Congress
• A jobless and very slow recovery
• A possible double-dip recession
• A zero interest rate Federal Reserve policy for two more years
• Will the Congressional gang of 12 be able to agree on anything?
• What does the downgrading of our debt to AA+ really mean?
• What impact will the Euro sovereign debt crisis have in the U.S.?
• Can anything be done to help the unemployment and housing situations?

I have opinions on all of the above issues, but I want to finish this newsletter without writing a dissertation. In the next few paragraphs, I will make several observations and comments.

1. The credibility of all the rating agencies is suspect, and the U.S. government is not in any danger of defaulting on its debt.
2. Equity markets are much cheaper now than in 2008, and corporations are making record profits.
3. Geopolitical uncertainty and sovereign debt concerns, especially in the Euro-zone, will be with us for years. In fact, France is the latest country in the spotlight for a possible downgrade.
4. Resolving the debt crisis in Europe, as well as the U.S., will be a prolonged and very painful process to watch. But it will most likely be resolved.
5. At the moment we are not on the verge of another recession. But slow growth is the norm and the economy is very fragile.
6. The rating downgrade will hopefully serve as a “wake up call” to Congress and prompt them to act in a credible way to reduce our debt to GDP ratio and secure our financial future.
    

What should investors do now?

It’s a natural reaction to be concerned – but don’t panic. It is critically important to understand that we have a long term investment plan in place for all our clients. And we all know that markets don’t go up every day, or every month, or every year. What is most upsetting currently is the volatility, the magnitude of the swings, and the acceleration of the 24/7 news stories on TV (cable TV). For the last week, CNBC has been running “Markets in Turmoil”. Do we really need this sensationalization by the media? An abundance of information does not lead to better decisions. Much of this market behavior is based on fear and emotions. Let’s not succumb to this!


With respect to your portfolio, it is important to note that we have already been positioning our clients more conservatively over the last few years. We hold many investments specifically because of their stable behavior in volatile and uneven markets. Times like these can cause discomfort, however, your diversification helps mitigate the overall risk.

In summary we are in for a bumpy, up and down roller coaster ride (which I don’t like). But let’s stick with our long term plan which we laid out over many meetings, and not overreact emotionally to this volatile market.

If you have any questions or concerns about your portfolio or any of these issues, please call.

Turn off the TV and enjoy the rest of the Summer!

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Unimpressed with U.S. deficit reduction plans, S&P delivers on its warning.

August 8, 2011

Unprecedented and unsettling. Standard & Poor’s issued a historic downgrade of U.S. debt on August 5, sensibly waiting until the market week had concluded to send a shock wave toward global investors. It reduced America’s long-term debt rating – which had been AAA since 1941 – to AA+.¹

S&P felt Congress did too little too late. The credit rating agency had threatened to lower the boom if Congress passed any deficit reduction plan smaller than $4 trillion in scope. The Budget Control Act of 2011 “falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” an S&P statement noted. It also retained its “negative” credit outlook on the U.S.²

S&P is also skeptical that the federal government can collect more money from taxpayers. Its analysts do not think the Bush-era tax cuts will sunset at the end of 2012 “because the majority of Republicans in Congress continue to resist any measure that would raise revenues.”²

On August 5, S&P sovereign ratings committee chair John Chambers told Fox News that the new AA+ rating could be cut to AA within 6-24 months if the U.S. doesn’t arrange to slash $4 trillion from its deficit in the next decade. The implication: Congress better agree on more cuts by February.³

China’s comments. The world’s largest holder of U.S. debt issued a critique of Congress through Xinhua, its official news agency. The state commentary stressed that the U.S. has a “debt addiction” only curable via major cuts to defense spending and entitlement programs. It also said that the option of a “new, stable and secured global reserve currency” should be explored.⁴

The Treasury’s claim.Friday evening, the Treasury argued that S&P’s analysis contained an accounting error that unnecessarily added $2 trillion to its projection of U.S. debt. S&P admitted the error but stuck with the downgrade.¹

So what happens now?The early August global response aside, analysts are divided as to what the short-term impact might be for the American economy. Could it cripple the recovery, or just prove inconvenient to it?

Demand was big for Treasury notes even before the threatened downgrade and Treasuries still symbolize comparative safety to institutional investors, so an August selloff might be short-lived. If this turns out to be the case, the effect on interest rates might be less significant than feared.

In the opinion of JPMorgan Chase analysts, Treasury yields could increase by 60-70 basis points as a result of the downgrade, translating to $100 billion in added annual borrowing costs for America. Citing Federal Reserve research, these analysts think that an increase of 50 basis points in Treasury yields (0.5%) could take a 0.4% bite out of U.S. GDP.²

Could the Fed launch QE3*?The possibility exists, particularly if foreign investors ditch dollar assets. The Fed’s Open Market Committee will make an announcement on August 9, and few analysts expect another wave of bond buying – but it is an option.

When might the U.S. recapture its AAA rating?It might take years for that to happen. S&P has cited political gridlock on Capitol Hill as a major reason for the downgrade, and it doesn’t see that going away in upcoming months. On top of that, the U.S. economy expanded just 1.3% in the first half of 2011 - about half the pace needed to dispel the lingering effects of recession.⁵

Are mortgage rates going to go north?Maybe; maybe not. Rates on conventional mortgages have a direct relationship with 10-year Treasury yields. Recently, those yields have dramatically fallen. Interest rates on auto loans might see a spike, as those rates are pegged to 2-year notes and factors like the LIBOR rate. The hardest hit might come from credit card issuers. Credit card interest rates reflect the prime rate. Credit.com credit card advisor Beverly Blair Harzog told CNNMoney that she believed credit card firms could possibly jack up rates 1-5% as a result of jitters over the downgrade.⁶

Wall Street might sail through this.Does that sound far-fetched? Look at some historical examples. S&P downgraded Canada’s AAA credit rating in the spring of 1993, yet Canadian stocks gained 15% in 1994 and our northern neighbor had its AAA rating back by 1997. Moody’s Investors Service downgraded Japan in November 1998 and its stock market advanced more than 25% in the next 12 months. Italy, Canada, Ireland, Japan, Belgium and Spain have all suffered S&P downgrades from AAA, and most of these cuts had little sustained impact on government bond yields.^6,7

We are continuing to monitor the situation. Call if you have any questions.

* Quantitative Easing [round] 3

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

“When buying and selling are controlled by legislation, the first thing to be bought and sold are legislators.”

-      P.J. O’Rourke

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Citations.

1 - nytimes.com/2011/08/06/business/us-debt-downgraded-by-sp.html [8/5/11]   

2 - bloomberg.com/news/2011-08-06/u-s-credit-rating-cut-by-s-p-for-first-time-on-deficit-reduction-accord.html[8/5/11]               

2 - bloomberg.com/news/2011-08-06/u-s-credit-rating-cut-by-s-p-for-first-time-on-deficit-reduction-accord.html[8/5/11]               

3 - foxbusiness.com/markets/2011/08/06/sp-us-faces-further-downgrade-beyond-double/ [8/6/11]

4 - nytimes.com/reuters/2011/08/06/world/asia/news-us-china-sp.htm [8/6/11]

5 - huffingtonpost.com/2011/07/29/gdp-us-q2-second-quarter-expectations_n_913032.html [7/29/11]

6 - money.cnn.com/2011/08/06/pf/sp_rating_money.moneymag/ [8/6/11]
7 - marketwatch.com/story/china-rips-us-on-debt-rating-downgrade-2011-08-06 [8/6/11]

 August 5, 2011

August 4: the Dow’s toughest day since December 2008.On his 50th birthday, President Obama watched Wall Street cast a no-confidence vote in the economy he had been assigned to turn around. The Dow Jones Industrial Average sank 512.76 and experienced a correction Thursday, with the S&P 500 (-60.27) and NASDAQ (-136.68) also down more than 10% from spring peaks.¹

Developments overseas generated anxiety on Wall Street.Citing “renewed tensions in some financial markets in the euro area”, the European Central Bank abruptly announced a bond-buying program Thursday, a distinct reaction to fears that Italy or Spain might need a bailout from the European Union. ECB president Jean-Claude Trichet stated that “downside risks may have intensified.” The ECB didn’t detail what debt securities it would buy or the amount of the purchases. Early indications hinted that the campaign would be modest. The ECB broadened the scope of its lending to Eurozone institutions at its benchmark interest rate this week in a move to aid feebler banks; the Bank of England kept its key interest rate at 1.5% and the ECB held its key rate at 0.5%. These firefighting moves did little: the FTSE 100, CAC 40 and DAX all dropped between 3.4%-3.9% on the day.^2,3

Japan’s central bank sold 1 trillion yen Thursday in an effort to weaken the currency while also announcing an increase in asset purchases. This move followed the Swiss National Bank’s Wednesday decision to reduce interest rates to near zero to try and weaken the Swiss franc, which had climbed 10% versus the euro in July. The dollar went 2.3% higher against the yen on the day.^4,5,6

Gold & oil posted losses on the firmer dollar.Gold slipped 0.43% Thursday to $1,656.20 per ounce; oil pulled back 5.77% to fall to $86.63 a barrel.⁷

Treasury prices rallied. The yield of the 10-year note went down 15 basis points (0.15%) to 2.48%, the biggest descent since June 2010; 2-year note yields fell to a new low of 0.26% on Thursday.⁸

Could we see a rally out of this position?Some market analysts thought a correction would take place this summer, with the major indices subsequently recovering in fall. Regardless of market reaction to Friday’s jobs report, stocks could rebound, even before the holiday season.

At a time when bullish sentiment is being severely strained, it is worth accentuating the positive. Bloomberg data indicates that 77% of S&P 500 firms have surpassed average profit forecasts of analysts in this earnings period. The S&P 500 was trading for 13.8x reported earnings on the day before the correction - the cheapest level in 13 months. Birinyi Associates data notes that the average bull market since 1962 has lasted about 49 months (the current one is about half as old). In the past 39 years, 25 corrections have occurred in bull markets, and just 9 have led to bear markets; on average, these corrections have lasted 118 days. That is history, not the near future. Yet while the future is ultimately unknown, we can recall that last year’s correction did not send Wall Street into a bear market.^9,10

We will send you additional information in the next few days. In the meantime, call us if you have any questions or concerns.

Stay cool and stay tuned!

Sincerely,

“When did the future switch from being a promise to being a threat?”

-      Chuck Palahniuk

 Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Here are the particulars of the Budget Control Act of 2011.

August 4, 2011

The Budget Control Act of 2011 has become law – just in time to meet the August 2 Treasury deadline and reassure world financial markets. The framework of the new law is complex and shows that both Democrats and Republicans can claim some victories.

The federal deficit will be reduced by at least $2.1 trillion. That figure comes from the non-partisan Congressional Budget Office. The savings will be realized over a decade ... although it isn’t yet clear where the bulk of the cuts will be made.¹

• More than $900 billion will be saved through the first wave of cuts.
  
  
  • Discretionary spending on defense and non-defense programs will be reduced by $741 billion over a 10-year period. This includes a $350 billion cutback in defense spending at the Pentagon (a Democrat goal in the negotiations).
    
  • Another $156 billion in savings will emerge as a result of shrinking interest costs on the national debt.
    
  • Another $20 billion will be cut from education loan initiatives and through efforts to identify fraud and abuse in other mandatory federal programs. (Student loan funding will be reduced to $22 billion by 2021, but Pell Grant funding will increase by $5 billion by 2015.)^1,2
    

A bipartisan committee of 12 will have to recommend between $1.2 trillion and $1.5 trillion in additional federal budget cuts by November 23.

• This committee will likely propose cuts to Social Security, Medicare and Medicaid and perhaps further reductions to the defense budget. Its membership will be handpicked. House Minority Leader Nancy Pelosi (D-CA) and Senate Majority Leader Harry Reid (D-NV) each get to select three Democrats; House Speaker John Boehner (R-OH) and Senate Minority Leader Mitch McConnell (R-KY) each get to pick three Republicans.
  
• Congress has to vote on their recommendations by December 23. If the bill is defeated, then automatic budget cuts will kick in on January 2, 2013 - at least $1.2 trillion worth, divided almost evenly between defense and domestic spending. (Social Security, Medicaid, military pay and veteran’s benefits would be exempt; Medicare would not be, according to House Speaker Boehner.)
  
• In addition, a Congressional vote on a balanced budget amendment to the Constitution will occur before the end of 2012. An approved balanced budget amendment would have to be ratified by two-thirds of the states. (This was a key victory for Tea Party Republicans.)^2,3,4

The debt ceiling will be raised by up to $2.4 trillion. It will be raised incrementally from the current $14.3 trillion level, dependent on a series of triggers:

·         The first trigger: the bill’s passage. Congressional approval amounts to a formal declaration that the federal government is less than $100 billion away from hitting the debt cap. Now that the Budget Control Act of 2011 is law, President Obama is expected to immediately raise the debt limit by $400 billion.

·         The second trigger: the initial $400 billion increase. This move initiates another formal request to hike the debt ceiling by another $500 billion dependent on Congressional authorization. It is widely assumed that Congress will disapprove this request, with President Obama vetoing the disapproval and Congress failing to override the veto. The probable outcome: the debt limit rises by the desired additional $500 billion.

·         The third trigger: what Congress does by December 23. Here are the possibilities that could play out during the holiday season:

o   If Congress fails to pass the deficit-reduction bill generated by the bipartisan committee of 12, then President Obama can formally request another hike in the debt limit – a $1.2 trillion increase. Congress would likely reject this request, President Obama would use his veto power in response, and Congress would likely fail to override the veto.

o   If Congress passes the deficit-reduction bill, then President Obama gets automatic authority to raise the debt cap by an amount equivalent to the budget cuts defined in the new law.

o   Alternately, if Congress passes a balanced budget amendment and sends it to the states, President Obama immediately gains the authority to raise the federal debt limit by $1.5 trillion.³

Tax hikes for the rich? Not immediately. In a key Republican victory, the two-step bill does not include tax increases or new levies for those in the highest tax brackets. House Speaker Boehner said July 31 that the forthcoming 12-member committee could not approve tax hikes – it would be “impossible” under current federal budgeting rules. Yet with the expiration of the Bush-era tax cuts increasingly probable in 2013 and the possible elimination of some deductions and exemptions in the tax code to generate additional revenue, there is a good chance many Americans will pay out more to the IRS in the near future. The White House says $1 trillion could be saved alone by not extending the EGTRRA/JGTRRA cuts further.⁵

December isn’t that far away. Expect more drama on Capitol Hill as 2011 ends, with a chance of added volatility in our financial markets.

We are sure that the above information can be somewhat confusing and overwhelming. We are still digesting this bill, as you probably are as well. Stay tuned for our upcoming newsletters to hopefully shed some more light on this as it unfolds, and for our commentary and opinion on what this all means and how it will affect that markets.

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

“It is the duty of the patriot to protect his country from the government”

-          Thomas Paine

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Citations.

www.petemontoya.com

1 - money.cnn.com/2011/08/01/news/economy/debt_ceiling_deal_cbo/ [8/1/11] 

2 - npr.org/2011/08/01/138885258/congress-to-move-quickly-on-debt-spending-deal [8/1/11]           

3 - blogs.abcnews.com/politicalpunch/2011/07/debt-ceiling-framework-where-they-landed.html [7/31/11]      

4 - theatlantic.com/business/archive/2011/08/congress-needs-a-kinder-gentler-balanced-budget-amendment/242871/ [8/1/11]

5 - foxnews.com/politics/2011/08/01/tax-hikes-impossible-under-debt-deal-think-again/ [8/1/11]

July 29, 2011

As we approach the August 2^nd deadline, Congress continues to astound us with their incompetence and inaction. The latest Boehner bill wasn’t even brought to the House floor for a vote.

We still believe that the Federal government will be able to avoid default, but it will probably lose its AAA credit rating. 

We are going to lay out what we think is the most likely scenario:
                                                 

• • There will be some compromise to allow the debt ceiling to be increased.
  • The ceiling will only be increased by about a trillion dollars.
  • The whole issue will have to be revisited within 6 to 12 months.
  • There will be a downgrade of U.S. debt from AAA to AA.

Any action short of a $3 to 4 trillion bill will have enormous repercussions. We will discuss that in more depth in future articles.
 

Maybe we should just turn off the TVs, radios, and smartphones until next Tuesday, then hope we will wake up to a brighter day!

Stay cool and stay tuned!

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

To read our previous newsletters on the debt ceiling issue, click here http://www.kohlheppadvisors.com/pages/kohlheppUpdate.aspx?LinkID=109337&spid=94786 and scroll to the bottom to view our archived newsletters.

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

A minor global rally follows a major geopolitical event.When Osama bin Laden’s death was announced, Wall Street rejoiced – albeit briefly. After Wall Street opened for business Monday, the S&P 500 started out trading 0.4% higher and the Dow was up 0.3% out of the gate. Germany’s DAX was up 0.5% and France’s CAC-40 rose 0.3% higher after their opening bells (with Air France and Lufthansa shares notably climbing). Japan’s Nikkei 225 was up 1.0%; South Korea’s KOSPI was up 0.9%.^1,2

However, Monday happened to be a market holiday in China, Singapore, Thailand, Hong Kong and Malaysia, so any effect on their benchmarks was muted. At the closing bell stateside, the U.S. indices ended up pretty much where they had begun the day – Dow, -0.02%; S&P 500, -0.18%; NASDAQ, -0.33%.^1,3

Andrew Wilkinson, the senior market analyst at Interactive Brokers in Montreal, was one of many analysts to downplay the effect. “It seems fanciful to accept that global equity markets had been restrained for a decade for fear that Osama bin Laden might pull off another terror attack somewhere around the globe,” he told Toronto’s Globe & Mail.“The world economy has lived through two recessions since 9/11.”¹

While there was no real “bin Laden bounce” Monday, what about a long-term effect?

Is there a “peace dividend” ahead? Osama bin Laden’s death may boost morale, but it is not likely to have any real impact on our military spending or our economy. “I don’t think this is a big market factor,” Warren Buffett simply told the Fox Business Network. As University of Central Florida economist Sean Snaith said to the Christian Science Monitor,“It’s not a panacea for the country. Oil prices are not coming down. If you still don't have a job, this isn't going to change things for the better.”⁴

When the Berlin Wall fell, the U.S. did get a “peace dividend”: our military spending shrunk by $188 billion (in today’s dollars) across 1985-1998. Today, we still have a presence in Afghanistan and Iraq, and Al Qaeda remains to be dismantled. The federal budget request for U.S. military operations in Afghanistan and Pakistan for FY 2012 is $107 billion, only mildly below the current $115 billion allocation. Osama bin Laden’s death provided a lift to many Americans; while the world may feel safer as a result, the stock market continues to take its cue from traditional financial indicators.⁴

As always, we will continue to update you and watch any of the potential affects this may have on the economy and the markets. Please call us if you have any questions or would like to discuss this further.

Sincerely,

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

April 20, 2011
 

As an investor, you’ve probably noticed among the screaming headlines and constant media coverage, that the Standard & Poor’s bond rating division recently threatened to downgrade the credit rating of U.S. Treasury bonds. The U.S. markets dropped 1% on Monday immediately after the news broke, and the S&P 500 index of large cap stocks finished the day down 1.1%.

What was not emphasized in the news coverage is that this is far from an actual downgrade. The announcement actually said that Treasury securities would be given an AA rating (the credit rating of Japan), rather than the current AAA (the highest credit rating, which is also enjoyed by France and Germany), if the federal budget deficit is not addressed within two years.
 

Coming from the same organization which, in 2008 and before, gave AAA ratings to subprime mortgage debt instruments, this credit evaluation might be dismissed--except that other parties seem to be equally worried.   In February, PIMCO, the world's largest bond fund investor, announced that it had sold all U.S. Treasury securities in its $236 billion Total Return Fund. The company is worried that rising inflation and interest rates will cause bond values to drop. But it also noted that sustained deficits in the U.S.--like the much greater debts in Greece, Ireland, Iceland and other debtor nations--would cause global investors to demand higher interest rates on government debt. Higher rates on new issues would cause the value of existing bonds to fall.

But why are stocks falling when the conversation seems to be all about bonds? Investors may be worried that any rise in interest rates would raise the borrowing costs across Corporate America as the U.S. economy is still rebuilding from the Great Recession. But there may also be some concern that stocks haven't fully factored in the flock of black swans that are swimming around various corners of the global economy. An article in the April 17 issue of the Wall Street Journal lays out the case: Japan, the world's third-largest economy, has been staggered by an earthquake, tsunami and nuclear disaster--plus continuing aftershocks and more nuclear problems. North Africa and the Middle East, where much of the world's oil comes from, are seething with unrest and uncertainty. Portugal has joined Greece and Ireland in requiring a Eurozone bailout for its sovereign debt. Closer to home, the article tells us, many economists have dropped their first-quarter estimates of U.S. economic (GDP) growth to below 2%. Six months ago, the more bullish estimates were coming in around 4%.

Looking at all this uncertainty, one might think that getting out of stocks altogether is the wisest, safest thing to do, until things settle down again. The problem, of course, is finding a good place to redeploy the money. Should you buy the Treasury bonds that PIMCO is unloading? Global stocks? The global economic uncertainty has actually caused inflows into the U.S. market, which seems to be an island of relative calm, and has always benefited from investor fear and a flight to quality. Plus, as the Wall Street Journal article points out, the jobs picture in the U.S. is starting to improve. About 230,000 private sector jobs were added in March, and U.S. retail sales rose for the ninth straight month.  Remember there are always episodic events which may cause investors to question their investment decisions but, NO – we do not recommend pulling out of the market or changing your strategy. We and the managers we have chosen are monitoring the situation carefully and we have confidence in these strategies.

Any hint that the U.S. government will lose its best-in-the-world credit rating is likely to be sensationalized, even if the event won't take place for another two years, and even if it is conditional on no action being taken between now and then. If the government's cost of borrowing does go up from the current 3.40% on 10-year Treasuries, it would raise the cost of financing our nation's debts. But the news media never seems to provide a full perspective on these banner headlines. Japan's sovereign debt is proportionately higher than America's, and Japan received the dreaded credit downgrade to AA status earlier this year. That caused Japan's borrowing costs on its 10-year securities, to go up incrementally to, currently, 1.29%.

Stay tuned! Happy Easter!

“It’s easy to make a buck. It’s a lot tougher to make a difference”. ~ Tom Brokaw

Sources:

www.BobVeres.com

Japanese 10-year yields: http://www.tradingeconomics.com/Economics/Government-Bond-Yield.aspx?Symbol=JPY

U.S. government 10-year yields: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

Announcement of S&P's downgrade warning: http://news.yahoo.com/s/nm/us_ratings_usa_sp

Wall Street Journal article: http://online.wsj.com/article/SB10001424052748704487904576267490353062226.html?mod=WSJ_topics_obama#articleTabs_tab_quotes

This material was prepared by Bob Veres’ Inside Information  and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

THE SHORT ANSWER: OIL !!!!!!!!!!!!!!!!!

Libya possesses the world’s 9^thlargest oil reserves.   Even though the Libyans have very little oil trade with the U.S., Libya supplies a lot of the oil and gas to Europe – especially Italy. ; However, the markets are much more concerned about Saudi Arabia, which produces about 20% or more of the world’s oil, and has the world’s largest oil reserves.

 

Will the political revolutions spread to other oil producing nations, causing a prolonged rise in the price of oil? This would significantly disrupt the U.S. economic recovery. Oil is very close to $100 per barrel and a spike in oil hurts corporate profits and consumer spending. It is effectively a tax on businesses and consumers and will reduce GDP. In fact, according to Nariman Behravesh, a senior economist at IHS Global Insight, every $10 increase in the price of a barrel of oil reduces economic growth (GDP) by 0.2% after one year and a full 1% after 2 years.

 

The government would like us to believe that inflation is very low and under control.   But core inflation, as measured by the Bureau of Labor Statistics (BLS), does not include food or energy prices.   Food in the last month alone has risen by 5 to 8%, and gas prices are up significantly in the last month.  And according to my last observation, we all eat food and use energy.

 

BOTTOM LINE: The question on everyone’s mind is “how does all of this geopolitical strife affect me and my portfolio”? We are likely to see the following:

• Increased inflation as indicated previously in food, energy and commodity prices
• Greater short-term volatility in the stock market
• Higher energy prices and gas prices at the pump. Gas could easily be at $ 4.00 per gallon by the end of the summer……….I hope not!
• Greater perceived risk in the stock market
• Belief by the Fed that they will need to keep interest rates lower for a longer period of time

So far the stock market has digested the Mideast/Africa turmoil reasonably well. However, the market has risen for about 6 months in a row without a 10% correction. It would not be unusual if these events triggered a correction. And, if more dominoes fall, a more dramatic decline could occur.

Please be aware that we are NOT predicting a market decline, but just alerting you to the fact that these events call for more caution in our market outlook.

 

As always, please call us if you have any questions.   We do not believe that any corrections are needed in your portfolios at this time.   We believe your portfolio is already appropriately positioned for this type of environment. When we meet with you we will review any specific issues or concerns you may have.

 

As the nicer weather approaches and flowers start to bloom, we look forward to a happy and healthy Spring season.


Remember - we're on Facebook!

Sources: USA Today, Wall Street Journal, NY Times

This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

What factors need to be in place for this to happen?

Will the Mubarak government be toppled?Egyptians took to the streets in Cairo and other major cities Friday, facing riot squads and armored personnel carriers as they demanded political reforms and an end to the 30-year rule of the country’s president, Hosni Mubarak.

The Mubarak government shut down the nation’s internet providers and mobile phone network and imposed a nationwide nightly curfew within a 36-hour period Thursday and Friday. In response, a huge crowd surrounded the Cairo headquarters of Mubarak’s National Democratic Party (which was set on fire) and the nation’s key radio and television headquarters. Great Britain’s Telegraphreported that 870 in the crowd suffered injuries, with some protestors being shot.¹

How did the markets interpret the turmoil?The reaction was as expected: stocks dived, oil and gold prices immediately climbed and there was renewed interest in the dollar and U.S. government bonds.

Gold gained $22.30 (1.69%) on the COMEX, while oil rose $3.70 (4.32%) on the NYMEX. At the end of the U.S. trading day, gold settled at $1,340.70 per ounce and oil had topped $89 per barrel ($89.34). The U.S. Dollar Index moved north 0.55% on the day.^2,3

The Dow, NASDAQ and S&P 500 all tumbled Friday, though the descent also reflected disappointment over earnings reports from Ford and Amazon. On the day, the Dow fell 166.13, the S&P slipped 23.20 and the NASDAQ dropped 68.39.⁴

Basically, this is putting Europe on the back burner. For about a year, Wall Street has been watching the sovereign debt crisis in the EU. Now the focus shifts, or at least is split.

What if the Suez Canal is shut down? The possibility has come up given the level of Egypt’s unrest. It wouldn’t be just oil prices that would suddenly spike. Prices of other hard assets could rise as well, because the canal is a vital shipping channel for many other raw materials. Fear was back Friday: the CBOE VIX, the so-called “fear index”, was up 23.30 and hit an intraday high unseen since December 2.⁴
 

Was this simply the cue Wall Street had been looking for? There was the sense recently that stocks had been overbought, that some kind of selloff was coming. (After all, the Dow had been on an eight-week winning streak.) Friday’s events may have given institutional investors the sell signal they were waiting on – volume was considerable on Wall Street during the trading day.

Is this an isolated geopolitical event, or a spark?That, perhaps, is Wall Street’s biggest worry. Many observers think the demonstrations and unrest in Egypt were directly inspired by earlier protests in Tunisia and Lebanon. The big question is whether that inspiration will now spread to other Middle East nations with authoritarian governments, such as Yemen and Saudi Arabia. Today promises to be a very interesting day on Wall Street.

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations

1 – online.wsj.com/article/SB10001424052748703296604576005430598327972.html [1/28/11]

2 –blogs.wsj.com/marketbeat/2011/01/28/data-points-energy-metals-449/ [1/28/11]

3 –cnbc.com/id/41314224 [1/28/11]

4 –marketwatch.com/story/us-stocks-waver-ge-microsoft-tug-at-dow-2011-01-28?dist=afterbell [1/28/11]

5 –montoyaregistry.com/Financial-Market.aspx?financial-market=the-financial-security-rulebook-5-crucial-steps&category=3 [1/28/11]

It was a weak year for equities, but foreign markets had it worse.

January 4, 2011
 

2011 had a definite downside. Statistically, 2011 may end up being characterized as the year stocks stood still: the S&P 500 lost .003%, its smallest year-over-year change of any kind since 1947. Yet it was hardly a placid year; every week seemed to feature big rallies and selloffs, and seemingly every time we checked in on a financial website or TV program, some new anxiety had emerged.¹


 

If it wasn’t the debt crisis in the European Union, it was legislators on Capitol Hill. If it wasn’t the housing market, it was the job market (and in truth, the two were inescapably linked). Investors were jittery, and as emotions affect stocks as much as earnings and fundamental indicators, the great broad index of the American stock market wound up generating a less than thrilling return.

 

However, there was also an upside. Is the glass half-empty or half-full at this point? That’s a good question. Bulls were heartened by the way U.S. stocks held up in 2011. Comparatively speaking, the rest of the world may be marveling at how well we did:

• DJIA: +5.53%
• S&P 500: -0.003% (+2.11% with dividends)
• NASDAQ: -1.80%
• Russell 2000: -5.45%^1,2,3

Now look at how these foreign indices fared in 2011, according to performance data from the Wall Street Journal’s website:

• DAX (Germany): -14.7%
• CAC 40 (France): -17.0%
• Bovespa (Brazil): -18.1%
• All Ordinaries (Australia): -15.2%
• Shanghai Composite (China): -21.7%
• Hang Seng (Hong Kong): -20.0%
• Nikkei 225: -17.3%⁴

The DJIA was a member of the “fortunate five,” one of just five consequential benchmarks around the world that managed a 2011 advance. The others? Indonesia’s Jakarta Composite (+3.2%), Malaysia’s Kuala Lumpur Composite (+0.8%), the Manila Composite in the Philippines (+4.1%) and Venezuela’s Caracas General (+79.1% in a nation where inflation is running at 26%).^4,5

 

So the evidence points to a degree of decoupling taking place last year. Stateside, investors may have been distracted and troubled by news about EU debt and a slowdown in manufacturing in the Asia-Pacific region, but there was still some residual confidence, which was bolstered in the fourth quarter by some positive news about consumer spending and retail sales, a declining jobless rate, a bit of life in what had seemed a moribund real estate market, and banks being more open to commercial loans. ⁶
 

Will our relative good fortune continue? In 2012, will Wall Street pay more attention to domestic indicators and earnings than the headaches plaguing other economies?

We are all interconnected, of course; financially, the world is a small place. It is very possible that the big market swings characteristic of 2011 will repeat in 2012; currently, few things move the market up or down like news from the EU. However, with many of the EU economies veering toward recession and emerging markets cooling down, a U.S. economy that might realize but a small percentage of growth may start to look very strong indeed to the rest of the world, and that offers hope that our financial markets may perform better next year than some analysts expect.
 

We can only hope that is the case!
 

Happy New Year!
 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

“A New Year’s Resolution is something that goes in on “year” and out the other.”

-       Author unknown

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Citations.

www.marketinglibrbary.net

1 - blogs.wsj.com/marketbeat/2011/12/30/for-the-sp-500-2011-bascially-never-happened/ [12/30/11]

2 - blogs.wsj.com/marketbeat/2011/12/30/data-points-u-s-markets-71/ [12/30/11] 

3 - www.cnbc.com/id/45824871 [12/30/11]

4 - online.wsj.com/mdc/public/page/2_3022-intlstkidx.html [12/30/11]

5 – www.cnbc.com/id/45807143 [12/28/11]

6 - money.msn.com/market-news/post.aspx?post=7a929e98-4d99-44cb-98c9-a0ef1c3151c4 [12/30/11]
 

February 25, 2010

You've probably been hearing a lot about Greece recently, and before that about Dubai--two countries that were in danger of defaulting on what economic geeks call 'sovereign debt,' which basically means their country's equivalent of Treasury bonds.  Dubai's problem was $26 billion in debt issued by Nakheel, its most prominent real estate developer, which was tacitly backed by the government.  Order was restored last December when neighboring Abu Dhabi provided Nakheel with a $10 billion loan.  Greece, meanwhile, has $28 billion in government debt due in April and May, and as you read this, the European Union is debating when and how to come to its rescue.

What you probably aren't hearing is that all of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) are having similar troubles, and that in all cases, the problems were visible, and warnings were raised by economists, years before the budget crises came to a head.   According to a report by The Economist, Greece's debt is now up to 112.6% of its gross domestic product.  Ireland's is 65.8%, Spain's is 54.3%, Portugal's is 77.4% and Italy's is 114.6%.  What makes Greece stand out is that suddenly foreign buyers are shying away from its government securities, sending the yield on ten-year notes soaring to 7.1%, and raising the cost of rolling over the debt--sending deficits even higher.

Why should we care about the PIIGS?  The fear is that if one country were to default on its debt, it could trigger a Lehman-type domino effect to other countries with shaky economies.

Sovereign debt defaults, and the potential for problems in Greece to spread around the world, are a major fear. This issue has undermined confidence, but the ultimate danger to the U.S. economy has been vastly overestimated in my opinion. Greece’s government owes about $400 billion, which is just 4% the size of the $10 trillion U.S. mortgage market. As of yet, we know of no major financial institution, either in the U.S. or abroad, with solvency issues because of Greek debts.

Of course, this is not the main issue. Many fear that a Greek default could drive up interest rates for other sovereign debt and in other markets, drive down debt values, and perhaps kick-off another financial panic. Fortunately, the potential for this issue to spin out of control is very small. In fact, there is a very good chance that this entire episode leads to some sanity in government spending and a better, more market-friendly future.

As of 2008, Greece had a top income tax rate of 40% and a value-added-tax (VAT) of 19%. In addition, employers paid 28% of salary for social security, while employees paid 16%. The debt issues in Greece have little to do with revenue; they have everything to do with the worldwide inability of governments to spend within their means. The same is true in the U.S. It is not tax rates that are the problem; it is spending that threatens solvency. Just look at Illinois and California. If these states raise tax rates again, more people will leave, hurting the attempt to raise revenue.

Even if Greece, Illinois, California or the United States itself repudiated their debt – declared they would make zero payments – they would all still have substantial annual budget deficits. At that point, the only fix would be to cut spending because no one would lend them money.

In the end, the only way for Greece and other political entities to fix their budget problems is to cut spending. Politically, this is very difficult. But, in tough times like today, when everyone is feeling the pinch, it is just as hard to convince other (EU or U.S.) taxpayers to bail out the scofflaws.

Riddle: Give the names of 2 U.S. state capital cities which rhyme but share no vowels.

The fear that haunts U.S. economists is that, at some point, the world's bond buyers will lose confidence that America will ever get its debt situation under control.  It also may be the underlying fear among people who attend the Tea Party rallies around the country.  The real deficit problems in the U.S., however, are not found in government spending, per se, but the amount of money promised to future retirees in various. forms.  Lately, various financial planning conferences have heard presentations by David Walker, former head of the U.S. Government Accounting Office, now president of the Peter G. Peterson Foundation.  Walker gives a terrific speech on how America is executing a reverse transfer of wealth from the younger generation and unborn to the Baby Boom generation.  He does exactly what economists were doing in Greece for twenty years before the meltdown: telling U.S. that the longer we wait to solve the problems, the more likely we are to face an unsolvable crisis.

Perhaps the easiest example to understand is Social Security, which was enacted during the Great Depression, at a time when the average person's lifespan was 65.  65 also happened to be the normal retirement year, which meant that most citizens collected no Social Security benefits at all; only those who lived an unusually long time would get back the money that was collected into the government retirement system.  Fast-forward to today, when the average U.S. life expectancy is 78.2 years, and it is not uncommon for people to live to age 100.  The same is true of Medicare; when it was enacted, people were expected to receive benefits for a year or two, not additional decades.  In all, according to "The Complete Idiot's Guide to Economics," 23% of the U.S. budget is spent on Social Security, 12% on Medicare, 7% on Medicaid; recently, Congressman Randy Forbes estimated that mandatory entitlements now represent 62% of all federal spending.

We are learning from European countries that spent too much for too long: the solution is not anger or warnings, but concrete action that addresses the real sources of fiscal imbalance--and perhaps most importantly, a willingness to sacrifice our way back to a balanced budget.  Walker proposes means testing for Social Security recipients, arguing that it makes no sense to send government checks to billionaires.  The government will have to ration health care and put it back on a budget.  He tells people what “you” already know, and what Greece and some of its neighbors are learning: it doesn't work any differently for governments than it does for people; the numbers are just a lot bigger.

Best regards,

Edward J. Kohlhepp, CFP^®, ChFC, CLU

Edward J. Kohlhepp, Jr., CFP^®, MBA

Quote: “We would worry less about what others think of us if we realized how seldom they do.” – Ethel Barrett

Riddle Answer:  Austin & Boston

Compiled from various sources, including Bob Veres & Advisor Perspectives

These are the views of the author, Bob Veres and/or Advisor Perspectives, and not necessarily those of Kohlhepp Investment Advisors, Ltd. or Cambridge Investment Research, Inc.  Past performance is not a guarantee of future returns.

The Bush-Era Tax Cuts Live On

The markets have recovered significantly since the crash of 2008, but the journey has been anything but smooth sailing. This exasperating ride is not likely to end anytime soon. Unemployment is not coming down…there is still much uncertainty about taxes…we may still be facing a double dip recession…housing problems abound…and the mid-term elections have thrown us into gridlock.

The latest adventure is QE2 by the Federal Reserve. Let’s go through a very quick economics lesson: Quantitative Easing (QE) 101.

In a normal economy, the Fed affects monetary policy by increasing or decreasing the Fed Funds Rate, the interest rate banks charge each other for loans. To stimulate, the Fed lowers rates. However, with the rate essentially at zero today and banks not lending, the Fed has to try alternative measures, i.e., Quantitative Easing (QE).

The primary goal of QE is to stimulate the economy and eliminate the possibility of deflation. But how?

Successful QE relies on the fact that banks will “lend” these additional dollars into the system. It is likely that QE2 will have the following impact:

• Lower long term interest rates.
• Lower mortgage rates to help the housing problem.
• Increase equity/stock prices by making them a more attractive investment than bonds.
• Weaken further the “dollar”. This will stimulate exports.

Will QE2 work? No one really knows, but the Fed has very few bullets left in the gun. And the $600 billion stimulus over 8 to 9 months is their attempt to stimulate an economy stuck in a deep hole. We hope that it will stimulate inflation, which is much preferable to deflation. It is also likely to push commodity prices higher and further undermine the dollar.

This is a bold, complex plan with plenty of risks. Predicting future interest rates is impossible. But it is likely that short term rates will stay low at least through 2011. We also risk alienating our foreign investors, such as China and Japan, who buy 40% of our Treasuries. How long will they continue to lend us money at a near zero rate, especially when the dollar is getting weaker every day?

The Mid Tem Elections = Grid Lock

GOP picks up 60 seats in the House, 6 in the Senate. The 2010 midterm elections are over and frustration has prompted change in Capitol Hill. Republicans will control the House with at least 239 seats; Democrats will retain a narrow majority in the Senate with at least 51 seats.

Here comes gridlock. “We’re determined to stop the agenda Americans have rejected and to turn the ship around,” Senate Minority Leader Mitch McConnell (R-KY) told the press after the election. So will President Obama’s health care reforms be rolled back? Will federal spending be severely reduced?

Through 2012, you may not see much change at all. With Republicans controlling the House, Democrats controlling the Senate and President Obama’s veto pen at the ready, you can expect plenty of legislative stalemates.

Could gridlock benefit the markets? It could be bullish for stocks. With a conservative majority in the House, Wall Street could breathe a collective sigh of relief over the next two years, feeling less regulatory pressure and seeing fewer threats and a more business-friendly environment.

Much of the gains in September and October were likely in anticipation of this event. What we have found to be even more interesting are the reactions from both Republicans and Democrats. Republicans seem to be more optimistic in gaining the house and many new governors, while Democrats seem to be relieved that they were able to retain control of the Senate; and Harry Reid won reelection fairly easily. Let’s hope relief on both sides of the aisle leads to more optimism.

Taxes – will the “Bush” tax cuts be extended?

Both parties want to preserve the Bush-era income tax cuts. Analysts now think Congress may act to extend the EGTRRA/JGTRRA tax cuts through at least 2011. Will they be extended for all Americans, as Republicans want? Or just to households with incomes of less than $250,000, as Democrats want?

Two (lame duck) Democrats have proposed extending these tax cuts for all but the really rich. Senate Banking Chairman Chris Dodd (D-CT) would like them extended for households making less than $500,000; Sen. Blanche Lincoln (D-NE) has proposed setting the break at $1 million. In September, 31 House Democrats wrote a letter to their party’s leaders urging the extension of the cuts for all Americans.

Riddle: Joe and Paul both live in the same town, on the same street. They both visit the same hardware store and purchase the same type and brand of product on the same day and at the same time. Paul spends $3.00 on 102, but Joe is charged only $2.00 for 98. Assuming Paul has not been overcharged and Joe has not been undercharged, what have they purchased?

Capital Gains and Dividends

If the Bush cuts aren’t extended, the top rate on long-term gains will rise to 20% from 15% and dividends will revert to being taxed as ordinary income, with a top rate of 39.6%.

The fate of these rates is likely tied to the income-tax outcome, except that the Obama budget has requested a top rate on dividends of 20%.

Outlook

Whether the market will continue to advance over the next several quarters is, of course, impossible to predict. Although we would like to believe otherwise, it seems like Congress operates with a level of careless insouciance, being more concerned with re-election than important legislation. The U.S. consumer continues to work through substantial debt problems. The economic reality is that high unemployment and massive government debt may condemn us to slow growth for years to come.

Fortunately we at Kohlhepp Investment Advisors, Ltd. have investment strategies which can be effective in all climates.

As always, please contact us if you have any questions.

Have a wonderful Fall and a Happy Thanksgiving.

Best regards,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

 

Sources:

www.wsj.com
Aetna Capital Mgt, LLC

www.Navellier.com

Dear Clients,

Here is some encouraging information.

You may have heard that stocks tend to rally in fall and winter. That has often been the case. In fact, the S&P 500 and the Dow have gained repeatedly after the elections occurring in the third year of a first-term presidency.

These elections seem to elate Wall Street. While past performance is no indication of future success, consider this: Wall Street has witnessed rallies after every mid-term election since 1942.¹

The Leuthold Group, a Minneapolis-based investment research firm, has determined that the S&P 500 has gained an average of 18.3% in the 200 days following such elections. Widening the window of time, Goldman Sachs finds that the S&P has averaged an 18.1% advance during the 12 months following each of the 15 mid-term elections since 1950. (The gain averages 11.0% when control of Congress changes hands.)^1,2

Consider another intriguing statistic regarding mid-term election years: in the five instances since 1942 when an incumbent first-term president was a Democrat, the S&P 500 has gained an average of 21.3% for the year.³

The Dow may get a tailwind from the “third-year effect”. Since 1945, the third year of a presidential election cycle has tended to be very positive for the Dow. As MarketWatch columnist Mark Hulbert noted recently, the DJIA has averaged +24.7% in such 12-month periods (usually measured in fiscal years, i.e., 4Q-1Q-2Q-3Q) since the end of World War II. In fact, the Dow’s average returns in other fiscal years of a presidential term have been puny in comparison: +4.0% in year one, +1.9% in year two and +3.3% in year four.⁴

Last month, Standard & Poor’s chief investment strategist Sam Stovall told the Wall Street Journal that the DJIA has risen an average of 17.1% in calendar years following mid-term elections since 1945, with less than 10% of these years seeing selloffs.⁵

Will 2010 follow the historical pattern? Excellent question – after all, no one is clairvoyant. This year, stocks have not followed the longstanding trends. Stocks typically do badly in September, yet September 2010 actually turned the market around. When it comes to November, let’s hope history repeats.

As always, please feel free to pass this newsletter along to friends and family. If you have any questions or would like to more about your portfolio or the economy, please call.

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

10/19/2010

Investors entered the month of September fearful of past downturns, still haunted by the catastrophic decline in 2008. But yet again, the markets did the opposite of what many were expecting, posting the highest returns for the month since 1939, and the third best single monthly return in 10 years, according to the Associated Press. The Russell 3000 rose 9.44% in September, up 4.78%--for the year. 

The good news could be seen in all sectors of the Stock Market - large caps, mid caps, international and emerging markets. 

Some of the market gains appear to reflect good news in the economy. The Bureau of Economic Analysis reported on September 30 that it was revising its estimate of second-quarter growth in the economy: up 1.7%, after an increase of 3.7% in the first three months of the year. Corporate profits increased $47.5 billion in the second quarter after rising $148.4 billion in the first quarter. 

International investors are beginning to recover some of the losses from earlier in the year. The MSCI EAFE index, which measures the composite returns of the developed nations (although it excludes Canada, for some reason) was up 15.79% for the quarter, but the index is down overall 1.25% heading into the fourth quarter. Meanwhile, emerging markets are still booming. 

Treasury Bond prices rose slightly as the yield on 10-year maturities fell from 2.95% on June 30 to 2.51% at the end of the quarter. Remarkably, the yield on 6-month Treasury notes is still hovering at 0.19%. Yield to maturity on 30-year maturity issues were yielding 3.69% as the quarter ended.

It should be noted that the U.S. markets are close to finally climbing out of the deep holes they fell into in 2008 and early 2009. The 3-year performance of various indices, for the period ending September 30, is within striking distance of positive territory. If the markets offer gains in the last quarter similar to what we experienced in the third, investors who managed to stay in the market through the turmoil might be able to celebrate a full recovery of their portfolio value.

Meanwhile, it's helpful to remember that at the start of the quarter, people were questioning the viability of U.S. and global markets after the near-meltdown of Greece, Portugal, Spain and other Southern European economies. Each quarter, each year, seems to bring a new thing to worry about. But looking longer term, the U.S. equities markets have managed to post long-term gains despite some fairly serious disruptions, including World War II, the Cold War, the conflict in Vietnam, stagflation and the oil shocks of the 1970s, the market crash of 1987, the bursting of the tech stock bubble, and the subprime mortgage meltdown and collapse of Bear Stearns, Lehman Brothers and AIG in 2008. 

Indeed, if you look at the long-term movements in the stock market since the Great Depression, all of those events, which seemed pretty dire at the time, look like blips on the screen, small dips in the long-term growth of value in American and global publicly-traded enterprises. 

There is no doubt that there will be other events in the future which will seem to endanger--or at least derail--the long-term growth of capitalism. But based on the history of the past two centuries, one might feel confident that whatever challenges await us, people in all sectors of the U.S. economy will find ways to build additional value. 

The final three months of the year may bring the market indices back up to pre-meltdown levels, or they may disappoint. We simply cannot predict the short-term movements in stock prices and with all of the uncertainty in the political and tax arenas, we have chosen to focus our attention on protecting client’s portfolios. We shall see what the 4^th quarter brings as the markets digest the elections in November.

Best regards,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

The views expressed are not necessarily the opinion of Cambridge Investment Research and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Investing is subject to risks including loss of principal invested. No strategy can assure a profit nor protect against loss.

Sources:

GDP estimates, inflation and corporate profits: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Russell index data: http://www.russell.com/indexes/data/daily_total_returns_us.asp

S%P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--

Individual country data: http://www.emerginvest.com/WorldStockMarkets/Countries.html

Treasury market rates: http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml

Treasury Bond returns: http://www.latimes.com/business/la-fi-1001-markets-quarter-20101001,0,2854846.story

Best September since 1939: http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2010/09/30/national/a121755D84.DTL&type=business

Dear Clients,

There has been a lot of conversation recently about the possible end of the Bush tax cuts, and we have received questions about it from some of you. Here are some comments and opinions worth noticing.

In July, Treasury Secretary Timothy Geithner said that very few taxpayers would be affected if the landmark tax cuts of 2001 and 2003 expired. “I do not believe it will affect growth,” he calmly commented on ABC’s This Week.¹ Many legislators and observers on Wall Street and Main Street are far less calm about their potential end.

Why should they end now? The federal government undeniably needs more revenue to help shrink the deficit, and Geithner feels that letting these tax cuts go would not trigger a double-dip recession, as they affect only 2-3% of U.S. taxpayers.¹ However, many Republicans and more than a few Democrats see danger here as the richest Americans are also the most influential in job creation.

Grassroots momentum gathering. A new website created by the conservative League of American Voters (ReviewTheTaxCuts.com) is gathering signatures in conjunction with a TV ad campaign starring ex-presidential candidate Fred Thompson. This effort comes on the heels of Rasmussen and Gallup polls showing increased concern about taxes. In a mid-July Rasmussen Reports poll, 68% of Americans surveyed said taxes had become a “very important” issue. In April, 63% of Americans surveyed by Gallup felt their taxes would rise in 2011, the largest percentage to respond this way since 1977.³

A battle this fall in Washington. Republicans on Capitol Hill ardently want the tax breaks to remain in place. Democratic leaders in the Senate are striving to introduce a bill in September that would seek to preserve the cuts for the middle class only. Most Democrats seem to favor letting the tax cuts expire for households earning more than $250,000. House Speaker Nancy Pelosi (D-CA) is among the voices contending that they didn’t aid the economy much in the first place. Closer to the White House, Secretary Geithner feels that letting the cuts expire would send a message to the world that America is serious about tackling its deficit.³

This is an election year for many members of Congress, and it wouldn’t be surprising if some seats changed hands as a result of the influence of this issue.

More voices. Former Federal Reserve vice-chairman Alan Blinder favors letting the cuts expire. “We couldn't afford them then (and knew it), and we can't afford them now (and know it),” he recently told the Washington Post. “What might be the argument for retaining the tax cuts even though the long-run budget is deeply in the red? That America needs more income inequality? Seems to me we have enough.”⁴

MoodysEconomy.com chief economist Mark Zandi calls for moderation. Zandi feels the 2001 and 2003 cuts “should be extended permanently for families with annual incomes of less than $250,000 and should be phased out slowly for those making more than that.”⁴

If the sun sets on these cuts, taxes revert to pre-2001 levels. EGTRRA gave us six tax brackets (10%, 15%, 25%, 28%, 33% and 35%). If EGTRRA went away, so would the 10% tax bracket (the lowest bracket would become 15%) and the 25%, 28%, 33% and 35% rates would be respectively bumped up to 28%, 31%, 36% and 39.6%. (Households earning more than $379,650 would pay taxes at the 39.6% rate.)⁵

Then we have capital gains, of course. The ceiling on capital gains tax rates would move back up to 20% if these cuts expired. Additionally, qualified dividends would again be taxed at a taxpayer’s regular rate … which could be as high as 39.6% (see above).⁵

The death of EGTRRA would also wipe out the child tax credit, restore the “marriage penalty” (married joint filers wouldn’t be able to take 2x the standard deduction allowed for single filers) and bring back the phase-out for the personal exemption and itemized deductions.

There is much to consider. This will, most likely, become one of the hottest issues on Capitol Hill and across the country as we get closer to November.⁵

It appears that Congress and the Administration are leaning in the direction of extending the Bush tax cuts at least for those families with incomes above $250,000 per year. This is mainly due to the need to avoid a double-dip recession. We are less certain regarding the position on the capital gains and dividends issues.

We do know that the stock market will not look favorably on any tax increases, especially regarding dividends and capital gains. Lets’ hope Congress makes the tax moves needed to help us avoid a double-dip. We will keep you informed as we know more in the coming months.

As always, please feel free to pass this newsletter along to friends and family. If you have any questions or would like to more about your portfolio or the economy, please call.

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

The views expressed are not necessarily the opinion of Cambridge Investment Research and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Investing is subject to risks including loss of principal invested. No strategy can assure a profit nor protect against loss.

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting Representative or the Representative’s Broker/Dealer. This information should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.. www.pet

ermontoya.com, www.montoyaregistry.com, www.marketinglibrary.net

Citations

1 – nytimes.com/2010/07/26/us/politics/26geithner.html [7/26/10]

2 – cnbc.com/id/38467149 [7/29/10]

3 – blogs.wsj.com/washwire/2010/07/27/tax-cut-debate-grows-louder/[7/27/10]

4 – washingtonpost.com/wp-dyn/content/article/2010/07/30/AR2010073004758.html [7/30/10]

5 - forbes.com/2010/07/22/expiring-bush-cuts-affect-personal-finance-taxes.html [7/22/10]

1. Korean conflict– it has been alleged that the North Koreans torpedoed a South Korean naval vessel and 46 South Korean sailors died. Sabers are rattling on the Korean peninsula and if an armed conflict were to break out, there would be major concerns among global investors.

2. Oil mess in the Gulf of Mexico– the Deepwater Horizon Oil spill becomes worse every day. At its current size, if the Gulf oil spill was placed over New York City, it would extend into upstate New York and Connecticut, over into Pennsylvania and cover northern New Jersey….and sadly that’s just the surface oil. Financially every American has a stake in this. About 35% of the nation’s seafood comes from the Louisiana coast and so does a similar amount of domestic oil production. Predictions are that the spill will eventually get into the Gulf Stream, work its way through the Florida Keys up the east coast and eventually cross the Atlantic to the United Kingdom. There has been no serious success at stemming this disaster. This may wind up as the worst ecological disaster ever for the U.S. Just in the last few days a minor success was achieved with a cap which is trapping some of the oil. However, we still have to worry about a possibly active hurricane season.

3. Debt– The U.S. National Debt has passed $13 trillion. Only 6 months ago it was at $12 trillion. The larger the debt grows, the faster the government’s interest payments mount up.  Take a look at www.usdebtclock.organd see how the debt jumps hundreds of thousands of dollars every minute. One thing we have learned from Europe is that uncontrolled deficit spending is not good for any country. To be sure, there is too much debt in the world.

4. Iceland– other news stories have overshadowed this recently but the volcanic eruption in Iceland is still active and disruptive to air travel and economies in Europe.

5. Europe – what’s wrong?

·        Massive amounts of sovereign and corporate debt. Don’t the people, corporations and governments realize that debt has to be paid back?

·        Rampant unemployment – Spain has 20%+ unemployment.

·        No commonalities in tax system, retirement, etc. This is a key reason why the Euro is in trouble.

·        Will the Euro survive? Probably – but there are still a lot of problems ahead.

·        Hungary: Last week, the financial news media was talking less about Greece. Hungary briefly took the “crisis of the week” spotlight. Hungary’s new government warned that their economy was in a “grave situation” and that talk of a sovereign debt default was “not an exaggeration”. We suspect that Hungary will be able to get out of its mess because they are not part of the Euro and can devalue their own currency. Their budget deficit is actually lower (relative to GDP) than budget deficits in Britain and the U.S.

6. Unemployment – With a near 10% jobless rate, we are obviously in a slow job-market recovery. Most economists estimate that population growth alone requires 150,000 jobs to be created each month just to keep the unemployment rate steady.

Riddle: A zookeeper has a certain number of cages and a certain number of tigers. If she puts one tiger in each cage, she has one tiger too many. If she puts two tigers in each cage she has one cage too many. How many tigers and cages doesshe have? The answer is at the bottom of the newsletter.

The Markets– “The Correction”

This current decline is not unlike other declines after the market has risen so far so fast. Every “bull” market since 1932 has experienced at least one major correction of 10% or more before moving on to new highs. While uncomfortable for investors, corrections are normal and healthy and serve to prevent asset bubble formations.

We are living through a remarkable time of change for the global economy. It is a time of collisions as we journey toward a de-levered and re-regulated world. For investors this translates into a period of changing risks and opportunities. It is a world that calls for a broader investment universe and strategies that can better capture the opportunities available in the world of today.

Several of the market gurus whom we follow have sounded the drumbeat for market caution. Of course, no one can predict the market’s direction, especially in the short term. We believe, however, the evidence points to a range bound and volatile market for the rest of 2010. And without drastic changes in fiscal policy both domestically and abroad, we could be in for serious trouble economically.

We believe “caution” is the watchword for the foreseeable future. We are watching your portfolio but if you would like a further review for the purpose of risk reduction, kindly let us know.

We realize this newsletter has pointed out some of the obstacles we are facing today. However, we have positioned your portfolio with these risks in mind. We do have confidence in the resiliency of the economy and the markets over the long term, but we want to be sure to navigate these stormy waters in the meantime.

Have a great summer!

Riddle answer: She has three cages and four tigers.

Sources: Navellier.com, Wall Street Journal.com, MarketingLibrary.net, Frontlinethoughts.com, Advisorperspectives.com

What does health care reform include … REALLY?

As we continue to receive news on the new health care legislation, we will update you. The following hopefully adds some clarification to some of the public’s questions.

Confusing doesn’t even begin to describe it. Throughout the very long debate over health care reform, a great deal of misinformation (spurred by presumption or misunderstanding) was circulating. Additionally, many changes and alterations to the proposed law were made along the way. At this point, some of the arguments your friends, neighbors or co-workers continue to debate don’t even factor into the legislation signed by President Obama. So what’s the truth behind the Affordable Health Care for America Act?

Q: Will I be forced to change insurance?
A: No. That’s a MYTH.
If you’re satisfied with your current plan, you can keep it.²

Q: Will illegal immigrants now be covered by our money?
A: No. That’s a MYTH.
In fact, undocumented immigrants are expressly excluded from coverage. Only legal immigrants who pay their share will be covered.³

Q: Will I go to jail or be harassed by the IRS if I don’t have health coverage?
A: No. That’s a MYTH.
In 2014 Americans (except Native Americans, Inmates or those with religious objections) will be required to have health insurance or pay an annual penalty. True. However, the law prevents the IRS from using levies, liens or seizing property. Additionally, the IRS cannot impose criminal penalties (such as time in jail).⁴

Q: I heard there was going to be a 10% tax increase across the board. Is that true?
A: No. That is a MYTH.
While there will be tax implications, most of the biggest changes apply to medical manufacturers, insurers and pharmaceutical companies. In fact, some Americans may see no changes at all. Tax changes that could affect average individuals include …

·        A 10% sales tax on indoor tanning (yes, really)

·        A 0.9% increase on the Medicare tax rate

·        A 3.8% tax on investment income for individuals earning more than $200,000 and households earning more than $250,000 ⁵

·        Taxes on high-end or “Cadillac” health care plans (this excise tax would not begin until 2018 and only apply to insurers of plans that exceed $10,200 annually for individual coverage, or $27,500 annually for family coverage) ⁶

Q: Will the government now pay for abortions?
A: No. That’s a MYTH.
The law already in place which prevents using federal money to fund abortions (except in cases of rape, incest, or danger to a woman’s life) is not being altered. ²

Q: Will I have to pay for other people’s abortions?
A: No. That’s a MYTH.
Those opposed to abortion will not be forced to assist in funding them. You can simply select a plan that does not offer them. This applies not only to people who may have objections to abortions on moral grounds, but also to those who simply have no reason to pay an extra premium for that type of coverage (such as women past their child bearing years or single men). ¹

Q: Does the “Public Option” mean the government will run health care?
A: No. That’s a MYTH … and a non-factor at this point.
In fact, the “public option” did not make it into the final legislation that President Obama signed. THERE IS NO PUBLIC OPTION. Even before it was dropped from the bill, it was misunderstood to be government-run health care – wherein the government would make your health care decisions. Rather, it would have been government-provided insurance option to compete with private insurance.⁵

Q: Will my Medicare benefits be cut in order to extend care to others?
A: No. That, too, is a MYTH.
Brooks Jackson, director of FactCheck.org, says that although the reform package includes $500 billion in "cuts", it does NOT include traditional Medicare benefit reductions.⁸

Q: Does this mean that “death panels” are now a reality?
A: No. And they never were.
This myth was based on misunderstanding of a provision in the original bill that required payment, by Medicare, for health care practitioner-led end-of-life counseling. This is not part of the law.⁷

For more answers, you can visit www.whitehouse.gov/healthreform

As always, please call our office with any questions. We wish everyone a very Happy Easter!

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

These are the views of Peter Montoya Inc., not necessarily those of Kohlhepp Investment Advisors, Ltd. nor Cambridge Investment Research, Inc., and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information. Past performance is not a guarantee of future results.

.petermontoya.com, www.montoyaregistry.com, www.marketinglibrary.net

Citations

1 - cnn.com/2010/POLITICS/03/23/health.care.timeline/index.html?hpt=T1 [3/23/10]

2 - signonsandiego.com/news/2010/mar/23/health-care-myths-realities [3/23/10]

3 - poder360.com/article_detail.php?id_article=3994 [3/24/10]

4 - insurancenewsnet.com/article.aspx?id=174568 [3/24/10]

5 - americasnewsonline.com/healthcare-bill-does-very-little-to-hinder-health-insurance-companies-903/ [3/24/10]

6 - americasnewsonlineboston.com/business/personalfinance/managingyourmoney/archives/2010/03/tax_implication [3/24/10]

7 - theglobeandmail.com/news/world/no-death-panels-but-obamas-reforms-do-bring-change/article1508653 [3/22/10]

It would be wonderful if the U.S. financial markets could “decouple” themselves from what is going on in Greece, Portugal and Spain. Unfortunately, the debt situation in these countries is like a ripple in a pond. The question is, how strong will the ripple ultimately be and will its full force reach our markets?

The problem. Greece, Spain, Portugal, Italy and Ireland (affectionately referred to as the PIIGS) are all carrying enormous debts. On May 1, the New York Times put up a chart breaking this down: Greece owes $236 billion, which believe it or not is the smallest debt among these five countries. Portugal’s debt stands at $286 billion – and it owes roughly a third of that to Spain. Spain carries around $1.1 trillion in debt, and its economy is in horrible shape (20% unemployment). According to the Bank for International Settlements, it owes $220 billion to France and $238 billion to Germany. Ireland has $867 billion in debt, with about 40% of that owed to the U.K. and Germany. Italy owes $1.4 trillion, including $511 billion to France (almost 20% of France’s GDP).¹

After the euro was launched, Greece had access to a whole bunch of cheap debt - and the country used it nonchalantly. In the years since the establishment of the euro, Greece’s debt-to-GDP ratio has remained repeatedly above 100%.²

Europe’s biggest banks are heavily exposed to these debts, and so are some of ours: names like Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley. In fact, these five banks have $2.5 trillion of cross-border exposure in the crisis, with Citigroup the most exposed. So U.S. taxpayers have potential risk to these banks, the euro, and the European and world economy.³

The offer on the table. Finance ministers from the 27-nation European Union hammered out a deal in Brussels early Monday, May 10, under which the EU Commission and the International Monetary Fund will make available some 750 billion euros ($955 billion) in lending support to some of the 16 eurozone countries like Spain and Portugal to keep those nations from suffering the same fiscal fate as Greece. Greece has the chance to accept a $146.5 billion bailout from the International Monetary Fund and the European Union in exchange for austerity measures (less government spending and a lower standard of living). This would help Greece avoid default – that is, having to renegotiate its debt and possibly assume more. (As a sovereign nation, Greece cannot go bankrupt.) Many economists think Greece will go into a deep recession (or depression) which could last most of the decade.^2,4

Note: 20% to 40% of the International Monetary Fund is funded by the U.S. and consequently U.S. taxpayers.

The whole Greek economic tragedy had made for lurid headlines, one of those rare global business stories that gets the attention of average investors. You know that a country is bordering on dysfunction when its AIR FORCE goes on strike.


The potential ripple. It looks like the bailout will be accepted by Greece and its EU partners. This means some confidence will return and other Eurozone nations with big debts will be slightly less threatened. However, Greece still has a risk of default.

Should Greece default even with the bailout, some major lenders in France and Germany would be hit very hard. They would have to raise capital ratios and reduce the frequency of loans. That would hamper economic growth in France, Germany and in turn across Europe. In coming months, the U.S. and other nations could feel the pinch from such a slowdown.⁴

Keep in mind, Greece only represents about 2% of the Eurozone economy.² Greece’s economy (approximately $350 billion) is about the size of the U.S. state of Georgia. In the roughest scenario, Spain or Italy could default and the shock wave to European banks (and U.S. banks exposed to the debt) would be significantly greater. What would happen then? A credit freeze across Europe? Diving stocks? A trashed euro? A flight to gold?

These are merely scenarios, not present realities – but in a nutshell, this is what had Wall Street biting its nails this spring.

So is the bailout truly a solution? It was unpopular throughout the EU, but probably the right step to take. The move certainly helped defend the stability of the euro; in fact, German Chancellor Angela Merkel and French President Nicholas Sarkozy have jointly pledged to preserve the euro’s value.⁵

The worry is that other bailouts will be needed to preserve the fiscal health of other Eurozone nations. We all hope these countries can effectively manage their debt levels, for the sake of the stock market and the economy in our country.

As always call us with any questions you may have.

Best regards,

These are the partial views of Peter Montoya Inc., not necessarily those of Kohlhepp Investment Advisors, Ltd. nor Cambridge Investment Research, Inc., and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information. Past performance is not a guarantee of future results.

 Citations

Bernard Lawrence Madoff, a law school drop-out, founded his firm back in 1960 with $5,000. Quickly establishing himself as a prominent market-maker and seeking to compete with the bigger firms, Madoff looked toward using technology as his edge over the competition. He joined the National Association of Securities Dealers, serving as its vice chairman, and helped to create the NASDAQ in 1971.

Everyone was shocked that, with such an auspicious background, Madoff perpetuated such an outrageous scheme for so many years on so many people that counted him among their friends.

Everyone who talked with Madoff and his wife had nothing but good things to say about them. Clients told their friends about his consistent returns and pleasant demeanor, piquing their interest. Madoff used this popularity to his advantage, creating exclusivity around himself and his fund. It was a well-known fact that Madoff turned down many investors, and you had to have an “in” to be accepted. He was so nice that his relationship with many people was built on his handshake and smile rather than the proper due diligence which should be associated with a high-level fund manager.

Madoff reported consistent year-over-year returns in his Fairfield Sentry Limited Fund, which, when plotted on a graph, resembles almost a perfectly straight ascending line since its inception in 1990. His “modest” returns, usually in the low double-digit range, kept him under the SEC radar just enough to continue his operation.

When a fund manager “guarantees” positive returns - year in and year out, with no discussion of how he does it - clients should abandon ship immediately. Virtually no one can avoid the inevitable downturns in the market for so long.

An independent custodian, such as Charles Schwab or Fidelity, helps safeguard an advisory firm’s assets and reports major activities performed by the advisory firm, providing an extra layer of security for the clients. Custody of the assets is usually done by a third party custodian, but Madoff did all of this in-house. Without an independent overseer, he was allowed to steal money and easily create false account statements about the “returns” investors were receiving. 

Kohlhepp Investment Advisors, Ltd. is an SEC (Securities and Exchange Commission) Registered Investment Advisor having only limited authority. Kohlhepp Investment Advisors, Ltd does not and never has had direct access to your assets. We are authorized to trade but cannot move your money around without permission.

Madoff was very secretive about the process through which he created his returns. He used his “split-strike conversion” strategy (a sophisticated options trade) as his cover for everything. When people asked too many questions, they were asked to leave. Madoff made it obvious to his investors that he did not like too many questions and that it is not other people’s business what he does with their money.

How ironic it is for the person who fathered the NASDAQ system of computer-based trading to refuse online access to his clients and to send antiquated statements with 10-year old technology to his clients. User-friendly statements and online access is a standard feature among managers and firms across the board. It is obvious in hindsight why Madoff’s technology was so outdated: updating his technology would have meant additional staff was exposed to his charade.

Summary

In order to protect your investments, always remember the following:

1. NEVER make investment checks payable to the advisory firm, i.e., “Kohlhepp Investment Advisors, Ltd.” Your checks should be made payable to the custodian who “safeguards” the funds, e.g., Charles Schwab, Fidelity Investments, XYZ Trust Co., etc. The only exception to this would be for hourly and/or financial planning fees.

2. Always make sure you receive separate confirmations/statements for your investments (no less often than quarterly) from the independent custodian, Charles Schwab, Fidelity, etc. If you have multiple strategies you will probably receive multiple statements. These statements, either electronic or paper, will confirm your investments and trades and keep you up to date on your accounts.

3. Above all, your investment advisor should be a fiduciary. He or she should be schooled in the area of fiduciary duties and operate pursuant to a published code of ethics. It is evident that Madoff was unethical and illegal. He stole from his investors and broke the law.

We at Kohlhepp Investment Advisors, Ltd. are fiduciaries, always acting in your best interest. The fiduciary standard is a legal concept, but its core idea is not complicated. To act as a fiduciary means we professionals have to put aside our own financial interests, and also put aside the business/financial interests of any company we work with, and give recommendations that are solely and completely in the best interests of people like you, our clients.

In other words, our recommendations have to be made with only one concern: is this the best thing I (the professional) can do for you (the client), given what I know about who you are and what you want and need?

We encourage questions about your investment strategy. We follow guidelines placed upon us by you and the regulatory agencies. Though almost all registered investment advisors act in the best interests of their clients, the few bad apples taint the credibility of the whole investment industry. Should you have questions or concerns, we encourage you to contact us.

We truly hope this e-letter is helpful. Feel free to pass it on to friends and family. Let’s try to prevent any further Bernie Madoff scams from occurring.

Happy spring!

Source:Horsesmouth.com

The views expressed are not necessarily the opinion of Cambridge Investment Research and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Investing is subject to risks including loss of principal invested. No strategy can assure a profit nor protect against loss.

Economic forecasters sometimes describe the investment markets as a leading indicator, which means that they believe returns can anticipate good or bad economic news. Share prices fall when investors expect a recession, and rise when a recovery is expected--and last year's stock market growth seems to fit that pattern. The market rose last year faster than anybody expected, and so too, later, did the U.S. economy. On March 26, the U.S. Bureau of Economic Analysis reported that the U.S. gross domestic product increased at an annual rate of 5.6% in the fourth quarter of 2009, after a 2.2% increase in the third quarter. 

Nobody knows how we, the community of investors, could have known, during the darkest hours of March 2009, that better economic times were around the corner.

The U.S. equity markets were generally higher across the board in the first quarter of 2010, which is a terrific contrast with where we were at this time last year. Indeed, CNNMoney.com reported that the returns for the first three months of this year ranked among the best first quarter performances in more than a decade.

Wilshire Associates reports that the Wilshire 5000 total market index, the broadest indicator of U.S. stocks, was up 6.42% in the first quarter of this year. Most of the action came in March. The Wilshire index was actually slightly down for January and February, but March produced a 6.61% rise in the index. The S&P 500 also rose 4.9% for the quarter.

Wilshire's Mid-Cap index was up 9.11% for the quarter; the Russell Midcap rose 8.67%. Wilshire's Small Cap 250 rose 9.00% in the first three months of the year, and the Russell 2000 returned 8.85% over the same period.

A generally rising tide--and signs of an improving economy--seems to have floated all boats.

The EAFE index, the broadest measure of developing nations, reported a relatively calm-looking year-to-date return of 0.22% on the MSCI/Barra web site, and the Far East index was up a robust 6.29% for the quarter. Emerging markets were up 2.11%. Meanwhile, government deficit troubles in Greece, Spain and Ireland, and to a lesser extent in Italy cast a shadow over the European economies. European stocks in the MSCI index were down 2.33% for the quarter.

Real estate stocks continued a recovery that began in 2009 after two very difficult years. The FTSE NAREIT Index, which is compiled by the National Association of Real Estate Investment Trusts, experienced a total return drop of 17.83% in 2007 and fell another 37.34% the following year. But in 2009, the broad real estate index rose 27.45%, and recorded a 10.60% total return in the first quarter of this year. 

Even bonds offered positive returns. The Lehman U.S. Aggregate Bond index was up 1.64% for the first three months of 2010, and Treasury bonds started the year on a positive note. 

Nobody knows whether this sunny investment climate will continue, or whether the strong market returns over the past 12 months will give way to a new bear market. However, one indicator suggests that we may not be walking blindly into another frightening meltdown like the one we all experienced in 2008 and the first two months of 2009. The Chicago Board of Options Exchange measures volatility in the stock market by its VIX index--which is more precisely an expectation of volatility and risk over the next 30-day period, and is sometimes called Wall Street's "fear gauge." On November 20, 2008, the VIX index hit a ten-year high of 80.86, according to data compiled by the IMCA-RC web site. On March 23, 2010, the VIX index closing price stood at a more historically normal level of 16.35. 

Thanks to a positive uptrend in March, the past quarter's market returns represent one of those unusual periods when just about everything went up. Just a year ago, people were talking about the collapse of civilization, and six months ago there were worries that the economic stimulus package would not be enough to get the U.S. economy moving again--that the country was headed for a double-dip recession.

The economy won't be fully recovered until jobs come back, and the recent stock market rises haven't yet taken us back up to the levels before the Great Recession swept through like a hurricane. But people who were nervously sitting on the sidelines over the past year, and the past quarter, missed out a nice rally. Let's hope it continues.

Enjoy the Spring!

Best Regards,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

Sources:

First quarter returns are higher than most others this decade: http://money.cnn.com/2010/03/31/markets/thebuzz/index.htm

Economic growth rate: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Wilshire Indices: http://www.wilshire.com/Indexes/calculator/

Russell index data: http://www.russell.com/indexes/data/daily_total_returns_us.asp

Bond returns: http://www.lehman.com/indices/dailyreturn.html

International indices: http://www.mscibarra.com/products/indices/international_equity_indices/performance.html

Dollar's rise and fall: http://www.fxstreet.com/rates-charts/

VIX data: http://www.icmarc.org/xp/rc/marketview/chart/2010/

Global Stock Market index returns: http://www.emerginvest.com/WorldStockMarkets/Countries.html

NAREIT (Real Estate) data: http://www.reit.com/IndustryDataPerformance/FTSENAREITUSRealEstateIndexDailyReturn/tabid/77/Default.aspx

Unemployment data: http://money.cnn.com/2010/03/31/news/economy/ADP_private_sector_payrolls/index.htm?postversion=2010033109

The views expressed are not necessarily the opinion of Cambridge Investment Research and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Investing is subject to risks including loss of principal invested. No strategy can assure a profit nor protect against loss.

March 29, 2010

Taxes: This bill is an increase in taxes for upper income taxpayers. Starting in 2013, the Medicare tax on households with income over $250,000 will increase to 2.35% from 0% at present. Plus, a new 3.8% Medicare tax will be assessed on investment income for that same group.

In 2011, the tax rates on dividends and long term capital gains are expected to rise to 20% for households earning over $250,000.

Medical Care Industry: This bill will expand demand without much effort to control costs. The pool of insureds will be increased dramatically, possibly by 32 million. While there are many provisions preventing insurance companies from limiting coverage, there are few provisions that limit how much the insurance companies can charge for it, i.e., the insurance premiums.

According to J P Morgan Asset Management, early in the health care debate, the White House cut deals with pharmaceutical, insurance and medical device companies to dissuade them from fighting the reform effort. As a result, the companies appear to retain autonomy on price setting. However, they will pay cumulative taxes of $107 billion between 2011 and 2019. It appears they will be able to pass many of these costs and additional taxes on to consumers.

Federal Deficit: Theoretically, this legislation is supposed to reduce federal deficits by a cumulative $143 billion between now and 2019 and larger amounts later. It is obviously very difficult to estimate what total health care costs will be over the next decade. Certainly nothing suggests there will be reductions in either the quantity or prices of health services. Some observations:

• There is no malpractice reform
• There are no reasons for insurance companies to compete across state lines.
• There are only minimal controls in place to lessen the increase in health insurance premiums. In fact, if insurance companies have to cover tens of millions of additional people, many with pre-existing conditions and health problems, they are likely to increase premiums for healthy people, because they are not likely to accept lower profit margins.
• Should our country mandate that a person must buy health insurance or be penalized?
• Richard Foster, the chief actuary for Medicare, says the planned squeeze in federal payments to hospitals may cause many of these hospitals to drop out of the program.

This bill moves our country further away from the principles of market economics. In 2007, the US devoted 16% of the GDP to health care spending, compared to the second highest country, France (11%). Despite this, the US ranks 38^thin the world in life expectancy at birth. Is this bill likely to change either of these numbers for the better?

Note, there are many, many issues that are not addressed in this commentary. We will have future newsletters as more information and interpretation becomes available. Obviously, we all have concerns about the efficacy of the legislation.

Enjoy your Easter and Passover holidays with family and friends.

Best regards,

Edward J. Kohlhepp, CFP^®, ChFC, CLU

Edward J. Kohlhepp, Jr., CFP^®, MBA

Sources:

J P Morgan Asset Management

HR 3590 – The Patient Protection and Affordable Care Act

HR 4872 – The Reconciliation Act

The views expressed are not necessarily the opinion of Cambridge Investment Research and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Investing is subject to risks including loss of principal invested. No strategy can assure a profit nor protect against loss.

But the fight is not over. The House of Representatives also passed a collection of amendments to the Senate bill by a 220-211 margin, but the Senate must also approve this reconciliation bill – exactly as it is worded. If that doesn’t happen, then guess what … there will be another vote on the Senate version of the bill in the House.^1,2

“If those people think they’re only going to vote on this once, they’re nuts,” Sen. Orrin Hatch (R-UT) said on Bloomberg Television March 20. Hatch claims that Senate Republicans have the votes to force a modification of the bill passed on March 21 and boot it back to the House for a second vote.³

Will the reforms be overturned? Twelve state attorney generals have indicated that they will contest the bill on these grounds the moment President Obama signs it.⁴ What are the odds the Supreme Court will throw the reforms out? Probably pretty slim. Look at the precedents of Medicare and Medicaid. When both those federal programs were enacted, the Court twice upheld a broad federal role in health care.

The big reforms will take effect in 2014. If you are looking forward to health insurance reform, you will have to wait a while before many of the big changes occur.

• Starting in 2014, individuals will be required to have health insurance coverage or pay an annual penalty which could climb to $750 or 2% of their income (alternately $695 or 2.5% of income), whichever is larger. Inmates, Native Americans, and those with religious objections would be exempted.^5,6
  
• In 2014, if you aren’t enrolled in an employer-sponsored health care plan, you will have to buy coverage yourself. You could shop for it through a state insurance exchange. The federal government will offer $500 billion worth of assistance to help insurance shoppers buy coverage through these state exchanges. Undocumented immigrants would not be able to buy coverage.^5,7
  
• After 2014, businesses with more than 50 employees could be fined as much as $2,000 per worker for failing to provide the option of coverage.⁵
  
• In 2014, insurers will be required to provide coverage to all Americans regardless of their health status.⁷
  
• Medicare spending will be cut by about $500 billion over the next decade, mostly in reduced government payments to Medicare Advantage plans. Democrats have claimed this will not shortchange Medicare recipients.⁵
  
• Federal money coming from the bill could not be used for abortions, with exceptions made in cases of rape, incest, or danger to a woman’s life.⁸
  

What changes are about to happen in 2010? These new rules would go into effect presently thanks to the new law.

• Insurers will be barred from revoking existing health insurance coverage on an individual, unless fraud or misrepresentation can be shown.⁶
  
• Insurers will not be able to limit the amount of money that can eventually be paid out on a health care policy, and it will be harder to limit the amount of money that can be paid out annually.⁶
  
• Seniors will get $250 payments to help them out if they face a coverage gap in the middle of the Medicare Part D prescription drug coverage plan.⁶
  
• Children will be able to stay on their parents’ health care policies until age 26, and they won’t be denied coverage because of pre-existing health conditions.⁶
  
• Adults with pre-existing health conditions will get a chance to enroll in a national high-risk insurance plan – albeit a temporary one.⁶
  
• Small businesses that sponsor health care plans for their workers could qualify for tax credits of up to 50% of the cost of the premiums they pay.⁶
  

New taxes? Yes – starting in 2013. Approval of these reforms will also bring a new 3.8% tax on investment income for individuals earning more than $200,000 and households earning more than $250,000, so the effective capital gains rate will be 23.8% for these taxpayers in 2013. Also, these taxpayers will be able to keep 8.8% less of the income resulting from taxable stock investments. The Medicare tax rate on households with income over $250,000 will also rise in 2013, from 1.45% to 2.35%.^5,6,9

A huge savings? Maybe. The non-partisan Congressional Budget Office estimates that the health care reforms will reduce the federal deficit by between $65-118 billion over the next decade and by more than $1 trillion in the decade after that.⁵

We will continue to keep you posted as the details and effects of these healthcare changes unfold.  Until then, Happy Spring!

Best regards,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

January 11, 2010

This is the time of year when everyone has an opinion of what the new year will bring. If you don’t have one, you have to make one up. We are not quite as susceptible to this because our clients “know” that we are market agnostic, and try to position portfolios that will be somewhat resistant to severe market downturns. Let’s first do a quick review of the last decade (2000-2009):

·        The S&P 500 gained +26.5% (total return result including the impact of reinvested dividends) in calendar year 2009, the 2^ndbest performance of the decade (behind the +28.7% gain in 2003) and the 11^thbest result in the last 50 years for the index (i.e., the years 1960-2009). The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market (source: BTN Research).

·        Since dropping to a bear market low on 3/09/09 (i.e., about 10 months ago), the S&P 500 has gained a remarkable +67.8% (total return) through the close of trading on 12/31/09 (source: BTN Research).

·        The S&P 500 was down 9.1% in aggregatefor the decade on a total return basis (i.e., the 10 years from 1/01/00 to 12/31/09). That performance is the worst decade ever for the stock index, falling below the negative 0.3% performance achieved during the 1930s. The best decade everfor the S&P 500 was the 1950s, a 10-year period when the stock index gained +487.1% (source:  BTN Research).

·        There has been zero net job creation since December 1999. No previous decade going back to the 1940s had job growth of less than 20 percent. Economic output rose at its slowest rate of any decade since the 1930s as well (source:  Washington Post).

·        “This was the first business cycle where a working-age household ended up worse at the end of it than the beginning, and this was in spite of substantial growth in productivity, which should have been able to improve everyone’s well-being,” said Lawrence Mishel, president of the Economic Policy Institute, a liberal think tank.

With all the good news in domestic and international stocks for 2009, why aren't we feeling any better? For many of us, 2009 felt like we were getting some of our money back, but we didn't get all of it. By the perverse math of down and up markets, an investor who took the full brunt of the 37.31% decline in the Russell 3000 index in 2008, would have required a 59.6% return in the next year to break even.

In addition, there is unhappy evidence that many investors didn't participate in the upturn--and, therefore, didn't make ANY of their money back. Some investors retreated from stocks after the downturn and watched the upturn from the sidelines. 

We are emerging from a historically bad decade for stock investors. If you managed to increase your wealth over the last ten years, then you deserve congratulations. 

Only the Great Depression-era 1930s and our recent decade of the 2000s delivered negative stock performance. Meanwhile, on December 31, the S&P 500 index closed out its first decade ever with a total return loss--which means a loss even with dividends reinvested. 

So perhaps this is a time to count our blessings. The recession that began two years ago is officially ended, and the TARP program officially ended its existence in the final months of last year. 

Riddle: How many 9s are in the range of numbers from 1 to 100? (Remember, the number 99 has two 9s in it.)  See answer below.

What's ahead? With so many surprises over the past two years, professional soothsayers and prognosticators are being unusually cautious this time around. Normally, the year after a recession brings a hard and fast recovery, with GDP growth in the 6-8% range over the following 12 months. But a recent survey of economists by the Bloomberg organization found a consensus expectation of just 2.3% growth in U.S. economic activity, largely because the deleveraging process--paying back debts on the federal, state, local, corporate and personal balance sheets--may continue far into the future. Fortunately, if this continues, it will lead to a thriftier, financially healthier economy--eventually.

Of course, those predictions are merely guesses, as are anything you hear about investment returns during the next year. There are positive and negative surprises in our future, changes that will help or hurt. But generally, over time, the positive influences always tend to outweigh the negative ones, which is why we don't still live in caves or drive mules to work, and why the Dow is not still hovering around 43, as it did in the early 1930s.  We don't know what the future brings, but it's a good guess that the trauma of 2008, and the first decade of the millennium, will be remembered as unusual detours in the longer-term upward march of the markets.

So here’s to 2010 and a new decade. May it offer many opportunities and bountiful returns!

Best regards,

Edward J. Kohlhepp, CFP^®, ChFC, CLU

Edward J. Kohlhepp, Jr., CFP^®, MBA

“An optimist stays up until midnight to see the new year in. A pessimist stays up to make sure the old year leaves.” ~ Bill Vaughn

“Cheers to a new year and another chance for us to get it right.” ~ Oprah Winfrey

Answer to Riddle: 20, as follows: 9, 19, 29, 39, 49, 59, 69, 79, 89, 90, 91, 92, 93, 94, 95, 96, 97, 98 and 99 (note two 9s in that last numeral.) 

A couple of years ago, Boston University economics professor Laurence Kotlikoff publicized a mindblowing discovery: retirees could dramatically increase their Social Security checks by reapplying for Social Security benefits.

It was entirely legal; it was an opportunity that had lay unnoticed for years. It was soon discussed on National Public Radio and PBS, and in USA Today and a number of in financial magazines. Let’s discuss it here.

Hit “restart” and reset your SS. Everyone eventually applies for Social Security, but few people reapply – and that’s the key to this strategy, which can potentially bring retired couples $1,000 or more in additional SS per month. Kotlikoff calls it “restarting the Social Security clock”. If you have retired within the last few years, it is a move worth considering.

You can start collecting Social Security benefits when you’re first eligible, and then restart your payments at a higher rate later. You simply file Form SSA-521 (www.ssa.gov/online/ssa-521.pdf) to request a withdrawal of your Social Security application. After the SSA processes that form, you reapply for Social Security – and since you are older now than when you first applied, this time you will receive much higher payments.

For example, a 63-year-old individual who started Social Security benefits in 2008 at age 62 would have received a payout of $18,794 a year; waiting until age 66 or age 70 would have meant $25,732 or $35,250 annually for that person.¹

So if you feel you applied for Social Security too soon, this presents you with a remedy. As Kotlikoff noted in USA Today in 2008, a 70-year-old receiving $11,556 as a result of claiming early retirement benefits could reapply for Social Security benefits at age 70 and boost her standard of living by 14%. It would be like having an inflation-indexed annuity for about 40% less than the cost of a similar investment from an annuity provider.²

What’s the catch? You have to repay the Social Security benefits you have already received. But you don’t have to pay interest on that money.² Basically, you’re repaying an interest-free loan from Uncle Sam.

Now if enough people do this, there is the risk that the federal government may say, “Wait a minute – look at all these people exploiting this opportunity.” But very few retirees do.

If you do reapply, there’s nothing fishy about it. Visit your local Social Security office (make an appointment by calling 1-800-772-1213). Bring Form SSA-521 with you, or ask for it and fill it out while you are there. Don’t be surprised if the person on the other side of the desk doesn’t know what you’re talking about when you mention reapplying for benefits. So bring a copy of the formal SSA explanation (www.ssa.gov/OP_Home/handbook/handbook.15/handbook-1515.html ) with you.³

Once you repay your benefits, you can restart them whenever you want. If you fill out Form SSA-521 and hand over a check repaying the money you’ve received, you can reapply for benefits right then and there – the request is routinely approved.⁴

For the record, Form SSA-521 only allows you to check one of two boxes for why you want to reapply for benefits. The first is “I intend to continue working” and the other is “Other (please explain fully)”.⁵ Mickie Douglas, a spokeswoman with the Social Security Administration, told Financial Advisor Magazine that it is entirely legitimate to write down that you are reapplying because it is “financially better for you".¹

What risks do I run by doing this? The big risk is that you could die soon after you repay your benefits – you could be out, say, $50,000 or $60,000 without living long enough to enjoy much of the additional income. But survivor benefits would be larger for your spouse, of course. Speaking of spouses, widows and widowers cannot employ this strategy to reapply for a deceased spouse’s benefits.²

Is this a good move for you? It might be. In case you are wondering, Kotlikoff is no hack - he holds a Harvard Ph.D. in economics and is a former member of the President's Council of Economic Advisors. He knows his stuff, and so should you. If you have the money to repay a lump sum equivalent to the benefits you have received, this may be a great move – but talk with your financial or tax advisor to see how this decision affects your overall financial strategy.

Taxes: Note that you can also apply for a refund of the federal income taxes that you paid on the SS benefits received during the earlier years.

Riddle: A mall parking lot has 1,000 parking spaces, and 40% of them are for compact cars. This morning, there are 200 compact cars and some standard-size cars in the lot, which is 75% full. How many standard-size cars are in the lot?

Best regards,

Answer to Riddle: 750-200=550 standard-size cars.

These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

 “Life is 10% of what happens to me and 90% of how I react to it” –John Maxwell

Where Are We Now?

The question now is: Have the good times returned for the markets and the economy? In order to answer that question, I am going to borrow a story by Vitaliy Katsenelson which I believe is a good description of where we are today:

The economy reminds me of a marathon runner who runs too hard and hurts himself. But now he has another race to run. So he’s injected with some serious, industrial-quality steroids, and away he goes. As the steroids kick in, his pace accelerates, as if the injury never happened. He’s up and running, so he must be ok; this is the impression we get, judging from his speed and his progress.

What we don’t see is what is behind this athlete’s terrific performance – the steroids.

Of course, we can keep our fingers crossed and hope that the runner has recovered from his injury and what we see is what we get – the athlete is at the top of his game – but there are problems with this thinking. Serious steroid intake comes at a cost: it exaggerates true performance. Steroids can be addictive; once we get used to their effects it is hard to give them up. The longer we take them the less effective they are. Finally, there is a good reason why steroids are banned in sports: they damage the athlete’s body.

Our economy suffered severe injuries last year, and to keep it going massive amounts of steroids were and are being injected – they’re what economists call stimulus (or government intervention).

Let’s take a closer look at the extent of the steroidization.

In the US, things appear to be stabilizing and improving on the surface, but beware, there is a giant IV hooked up to the veins of the economy, through which billions of dollars are constantly being pumped in. The stimulus is everywhere:

• To help the auto industry taxpayers were subsidizing the price of autos through the “cash for clunkers” program.
• The housing market, the epicenter of this crisis, is propped up from different directions.
• The Fed set interest rates at near zero which allows banks to earn a healthy interest-rate spread.

Now let’s look at the side effects:

• Stimulus is a finite endeavor that comes with a heavy price tag. In most cases the stimuli have been financed with higher future taxes and rising government debt, thus higher future interest rates.
• Steroids and stimulus share addictive properties, and the longer we take them the less effective they become; but once we’re used to them it’s hard to give them up.
• Finally, stimuli result in long-term damage. For the most part stimuli just kick the can down the road and result in higher debt and higher taxes.

The stock market’s recent rally followed a typical, by-the-book, coming out of recession trajectory – it was cyclical, i.e., short term.

Source: Vitaliy Katsenelson, Advisor Perspectives, Inc.

Just because the Dow has broken 10,000 again doesn’t mean that our economic problems are behind us. Those of you who attended our recent seminar know that we are pleased with the market’s performance this year, but still believe we are, and will be, in a secular (long term) bear market for a number of years. The following is a list of some of the “headwinds” the economy and the market is facing: 

n      Rising unemployment (10.2%)

n      Rising deficits and massive government debt

n      Rising taxes

n      Rising interest rates likely

n      Slightly overvalued market

n      Low consumer spending

n      No “top line” growth

n      Likelihood of rising inflation

n      Possible deflation

n      Very slow to recover housing markets (High foreclosure rate)

n      Commercial real estate bubble looming