Posts
In This Issue
Economic Indicators in an Election Year
Monthly Market Commentary: Third Quarter U.S Stocks & Bonds Before & After Taxes
The Fiscal Cliff
Dump Your Banks High Fees
Core Holding Spotlight: Google
The Importance of The Importance of Rebalancing
The Tax Code and U.S. Competitiveness
Going Social
Economic Indicators in an Election Year
2012 presidential election is in full swing and, as we draw closer
to the November 6, 2012 election date, many Americans are wondering which
presidential candidate will be better for the economy. The U.S. economy has
always been a focal point of elections, and although no crystal ball exists to
determine election results (or stock performance, for that matter), economic
indicators may show how an incumbent has performed. A strong or improving
economy may add more credibility to the incumbent’s leadership abilities, which may
increase his odds of winning another term in office.
Since President Barack Obama took office in January 2009 in the
midst of a recession, through his time in office till now, economic results
have been mixed. The unemployment rate has fluctuated, but is now lower from
the high of 10% back in October 2009. The S&P 500 has recovered nicely and
GDP growth has also improved and held steady over the last 11 quarters.
However, home prices have continued to fall and gas prices to
rise. A home is one of the biggest purchases for a family, with most of their
wealth tied to their home. Falling home prices negatively impact the net worth
of American households and may affect their propensity to spend. Higher gas
prices mean people have to spend more money on gas, leaving less money for
other discretionary purchases. Finally, interest rates remain at all-time lows
as the Federal Reserve attempts to spur economic growth. This makes it difficult
for investors to earn any return from saving accounts and other low-yielding
investments, offering little reward to risk-averse investors or retirees.
Regardless of the election outcome, the President will probably
continue to make economic recovery one of his priorities and, in light of this
assumption, investors should expect the low-interest rate environment to continue.
Monthly Market Commentary
Although several bellwether stocks, such as Intel,Texas
Instruments, FedEx, Norfolk Southern, and Caterpillar announced earnings
warnings, investors mostly shrugged-off weaker fundamentals and placed their
hopes on growth through coordinated easing. Investors were not disappointed, as
additional quantitative easing (QE3) was announced on September 13th. Riots in
Spain caused markets to react negatively, durable goods orders took a dive
because of airline orders, and income and consumption numbers were hit hard by
a quick spike in inflation rates. However, year-over-year data for almost every
report continued to look a lot better than the volatile month-to-month
statistics.
GDP: Second quarter real GDP growth was unexpectedly revised
downward in September to 1.3%, after initially being revised upward to 1.7%
from 1.5% in August. Adjustments were across the board, which included a
slowdown in personal consumption, inventory growth, and negative net exports.
Employment: The recent jobs report revealed a surprise drop in the
unemployment rate to 7.8%, down from 8.1% in August. In September, 114,000 jobs
were added, but more importantly, the job numbers were revised substantially
higher for July (+40,000 jobs) and August (+46,000 jobs). These revisions are likely
to produce meaningful increases in both personal income and consumption growth.
Housing: Housing data was mixed as house prices rose but pending
home sales seemed lighter than expected. The Case-Shiller 20 City Index rose
1.2% sequentially and is now 7% to 8% above lows reached this spring. The
relatively consistent improvement in prices over the past few months should
help the appraisal process that has kept many pending homes that went under
contract from actually closing. Consistent price increases, along with
near-record low mortgage rates and skyrocketing rents, could push potential
buyers off the fence.
Manufacturing: New orders for durable goods were down a whopping
13%. A major air industry show in July often causes a huge boom for airline
orders in that month, followed by a collapse in August. If volatile categories
such as airliner orders and other transportation equipment are ignored, new
orders were down a modest 1.6% in August. Economists believe that while the
export news looked particularly bleak, a combination of ramp-up in jetliner
productions from Boeing and continued
improvements in the auto industry (auto sales hit a new recovery
high in September) should prevent a rout of the manufacturing industry in the
U.S.
Quarter-end insights: The initial fears at the end of the second
quarter that the U.S. would be pulled back into a recession because of
slowdowns in Europe and China, has not come to pass. Markets were surprisingly
strong in the third quarter, mainly from actions by central banks around the
world that drove markets higher. Although the housing recovery has been
improving for most of 2012, it has yet to have any significant impact on
overall economic activity since residential housing only represents 2% to 3% of
GDP. This excludes spending that typically follows home purchases, such as new
furniture and landscaping. Morningstar sector analysts’ quarter-end outlook
highlighted lackluster fundamentals that showed no definitive signs of either a
collapse or a boom. During the third quarter, cyclical and more
economically sensitive stocks generally did well while more staid
industries, such as utilities, generally underperformed the market. There is
also concern of a stronger dollar undercutting sales growth with a general fear
that the higher dollar may likely depress margins in the months ahead. High
margins and conservative capital spending have resulted in higher levels of
cash at major corporations, which is finding
its way into the mergers and acquisitions space. Much of the
merger and acquisition activity as well as general corporate growth stories
continue to be built around emerging-markets growth, despite near-term
pressures in some of those markets.
Notable core portfolio holdings: Google was our biggest winner this
past quarter (33.7%). Other winners included Procter & Gamble
(13.2%), Chevron (10.5%, since sold), SPDR Gold Trust (10.83%),
and PowerShares DB Commodity Index Tracking Fund (11.38%).
While our core holding in Applied Materials was
the worst performer of our ten core holdings, posting
a disappointing (-2.45%).
Conclusion: Going into the fourth quarter we
are cautiously optimistic. Fed Chairman Ben Bernanke’s efforts
to stimulate the economy and unappealing alternatives, such as
fixed income and foreign markets, should lend support for
equities.
Retirement Investing Q&A
Q: Under current law, at what age can you begin receiving Social
Security benefits?
A: The earliest age at which you can begin receiving Social
Security benefits is 62. However, you will receive a reduced benefit if you
retire before your full retirement age.
Q: What are some big mistakes that people make concerning their
retirement?
A: Not contributing to an IRA, a 401(k), or both is probably the
single biggest mistake that is made. 45% of current retirees utilize their
personal savings for retirement income; 62% of current workers anticipate personal
savings to play a role during retirement.
Q: What is the maximum contribution to IRAs (both regular and
Roth) and 401(k) plans in 2012?
A: If you are age 49 or younger, the maximum contribution is
$5,000 for both regular and Roth IRAs, and $17,000 for a 401(k) plan. If you
are age 50 or more, the maximum contribution is $6,000 for both regular and
Roth IRAs, and $22,500 for a 401(k) plan.
Q: Are distributions (payouts) taxed on regular IRAs, Roth IRAs,
and 401(k)s?
A: The short answer is that if you got a tax break on the
contribution, you will pay taxes on the subsequent distribution. Contributions
to regular IRAs and 401(k)s are generally made with pre-tax dollars (pretax contributions
reduce your taxable income for the year in which they are made), so
distributions are taxed. Roth IRA contributions, however, are made with
after-tax dollars, so distributions are generally not taxed.
Q: At what age can you generally begin taking distributions from
an IRA or 401(k)?
A: You can begin taking distributions from your regular IRA, Roth
IRA, or 401(k) plan at age 59 ½.
Q: Can you roll your 401(k) over into an IRA?
A: Yes. You can move 401(k) balances into a “rollover” IRA account
without penalty. This option enables you to keep your money tax deferred, and
can potentially increase your investment options, as IRAs
are self-directed and 401(k) plans have investment options that are
decided by the plan administrator.
Q: How can I begin saving for retirement?
A: Little changes can make huge differences. For instance, have a
regular coffee ($1.75) instead of a latte ($3.50) every morning before work.
Invest the savings each month ($1.75 X 22 workdays = $38.50), and you could end
up with quite a hill of beans!
Sources: Employee Benefit Research Institute, 2012 Retirement
Confidence Survey.
Take Advantage of Tax Free Income & Deferral
As a professional athlete or entertainer taxes can be
an issue. Here are two easy ways you can reduce your tax bill
to Uncle Sam. First is to consider purchasing tax free
municipal bonds. These bonds would provide a steady stream
of income, free from all federal, state and local taxes.
The second is to contribute to your leagues retirement plan or
if you are considered self-employed is to establish
your own 401(k) plan. These plans reduce your taxable income and
grow tax deferred.
The Fiscal Cliff
The term “fiscal cliff” has dominated headlines but besides adding
another phrase to your political vocabulary, what does it really mean to you?
The “fiscal cliff” is the U.S. fiscal situation that could dramatically change
the economic landscape in this country, defined by a bundle of momentous tax
hikes and spending cuts that are due to take effect at the end of 2012 and
early 2013. The intended goal of these tax hikes and spending cuts is to reduce
the national deficit. A reduction of national deficit appears to be a good
thing on the surface but such dramatic belttightening so quick has raised
concerns about the possibility of growth deceleration and a potential
recession. Before digging deeper, it is important to distinguish between
baseline and alternative fiscal scenarios. Under the baseline scenario,
existing policies would expire, allowing for the implementation of tax hikes
and spending cuts whereas the alternative
scenario calls for an extension of existing tax provisions.
According to the Congressional Budget Office (CBO), the 2012
federal debt held by the public will reach 73% of GDP; the highest level since
1950. Under the current baseline scenario*, the federal budget deficit will
shrink to an estimated $641 billion in 2013 from $1.1 trillion in 2012. Given
the current fragile economic conditions, the CBO anticipates that the U.S.
economy may fall into a recession if GDP declines and unemployment increases.
To be precise, the CBO expects the 2013 (year-over year) fourth quarter real
GDP to decline by 0.5% and the unemployment rate to rise to about 9% in the
second half of 2013. Under the alternative scenario*, the 2013 federal budget
deficit could total $1 trillion, with the 2013 (year-over-year) fourth quarter
real GDP growing by 1.7% and unemployment staying in 8% range.
If Congress fails to extend tax breaks, here is what we can
expect. The Bush tax cuts will expire and income taxes, estate taxes, capital
gains taxes, and tax rates on dividend income will increase. The Social
Security tax cut will expire, raising the rate from 4.2% to 6.2%. The
alternative minimum tax (AMT) will affect significantly more Americans.
High-income earners will be taxed as part of the Affordable Care Act (Obamacare).
Spending cuts legislated by the Budget Control Act of 2011 will affect the
national defense budget and other programs across the board. The emergency
unemployment compensation will expire at the end of the year. The Medicare
payment rate at which Medicare pays physicians will decrease by about
27%.
While inaction by Congress may have dire consequences, economists
expect Congress will take action after the 2012 election season to keep tax
rates from rising too drastically and delay the spending cuts. Until then,
revisit your retirement portfolio to ensure it is well positioned to weather a
fiscal cliff worst-case scenario.
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Core Holding Spotlight
Google (GOOG) $754.50 as of 9/28/12
Google Inc. (Google) is a global technology company focused on
improving the ways people connect with information. The company generates
revenue primarily by delivering online advertising. In June 2011, it launched
Google+. In September 2011, the Company acquired Zagat. In May 2012, Google acquired
Motorola Mobility Holdings, Inc. As of January 2012, over 90 million people had
joined Google+. In April 2011, the Company acquired PushLife. On July 31, 2012,
it acquired marketing start-up Wildfire. In September 2012, it acquired
VirusTotal and Nik Software.
Google saw a nice pop in its stock price during Q3, rising just
shy of 34%. Overall the fundamental outlook for the Internet Content &
Information industry remains positive for the next 12 months due to an increase
in corporate budgets going towards online advertising versus traditional
media.
We see continued growth from Google’s core business the company
has maintained its dominance in the internet search market, with a 66.4% share
of explicit core searches in August, according to comScore. It also leads in
internet video due to its YouTube video site, which had 150.2 million viewers
or 80% of the market in August. eMarketer, expects Google to take the top share
of the display ad market in 2012, with a market share of 15.4%, outpacing
rivals Facebook and Yahoo! We do have some concerns about the company’s mobile
advertising, an area that is growing rapidly, where pricing has been under
pressure.
Recently the company announced a new tablet computer, the Nexus 7
for an impressive $199.00. The initial reaction has been very positive and may
put a dent in Apple’s much more expensive iPad sales. During the past fiscal
year, Google increased its bottom line by earning $29.74 versus $26.30 in the
prior year. This year, the market expects an improvement in earnings ($42.81
versus $29.74).
The Importance of Rebalancing
Over time, your asset-allocation policy can veer off track because
of market ups and downs. This is illustrated quite clearly in the attached
image; a strong stock performance can cause a simple 50/50 portfolio mix to
become unbalanced over time. After 30 years, what was once a 50% allocation to
stocks now sits at 66%—quite a jump. Moreover, not only does the portfolio’s
allocation change, but the portfolio’s risk also changes, rising sharply from
9.1% to 11.4%. If your needs and/or risk tolerance have not changed, your
allocation shouldn’t either.
But why would anyone want to sell investments that have done great
in order to purchase laggards? While rebalancing might seem odd at first, it is
all about risk control. If more and more of your total portfolio winds up in
one investment, you risk losing a lot should that investment stumble.
The Tax Code and U.S. Competitiveness
While investors prepare for tax hikes in 2013, it isn’t surprising
to learn that taxes have become increasingly important when it comes to the
economy and U.S. competitiveness. The Harvard Business School recently
published results of a survey on U.S competitiveness, which aims to lay out
facts and realities of international competition and implications for the U.S.
In October 2011, about 10,000 alumni completed an in-depth survey on U.S. competitiveness. According to
the survey, the greatest current or emerging weaknesses are perceived to be
America’s tax code, political system, K-12 education system, macroeconomic
policies, legal framework, regulations, infrastructure, and workforce skills. Respondents
were deterred from investing in the United States not only by a high statutory
corporate tax rate, but also by the sheer complexity and uncertain future of
the tax code.
Going Social
We are pleased to announce that we are on several social media
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LinkedIn we have you covered. “Like” or follow us and each morning you will
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we will post breaking financial news and article that you can’t get anywhere
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Greater financial knowledge is just a click away.
©2012 Morningstar, Inc. 2012 RL Paler Investment Advisors,
LLC All Rights Reserved. The information contained herein (1) is intended
solely for informational purposes; (2) is proprietary to Morningstar, RL Paler
Investment Advisors, LLC and/or the content providers; (3) is
not warranted to be accurate, complete, or timely; and (4) does not
constitute investment advice of any kind. Neither Morningstar, RL Paler Investment
Advisors, LLC nor the content providers are responsible for any damages or
losses arising from any use of this information. Past performance is no
guarantee of future results. "Morningstar" and the Morningstar logo
are registered trademarks of Morningstar, Inc. Morningstar
Market Commentary originally published by Robert Johnson, CFA, Director of
Economic Analysis with Morningstar and has been modified for Morningstar
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