Friday, September 24, 2010

Muni bond implications of public sector vs. private sector wages

State and local governments are struggling with their budgets as the economic slowdown shows up in lower revenues such as income taxes and property taxes.  However the spending side of things shows what a disconnect has occured in public sector wages and benefits.  We ran across the chart below on the blog site Pragmatic Capitalism (http://www.pragcap.com/) and thought it was important to include in our blog:

jm091710image008

One implication for investors would be to recognize the heightened risk this poses for tax exempt investing and therefore stay with very diversified high quality municipal bond holdings as the public sector has to wrestle with trying to reduce costs (including high wages and benefits) in an environment of reduced revenues.

Saturday, September 18, 2010

Currency politics

Since the 2008 credit crisis we have seen central bankers all around the world reduce their policy rates and generally keep them low (remember the Federal Reserve has our fed funds rate presently at almost zero).  We have also seen "quantitative easing" where the central bank buys government bonds to push down long-term rates.  These low rates haven't generated the growth hoped for because businesses have been reluctant to borrow and banks have been tighter on their lending standards.

Also, there has been much fiscal stimulus in form of government spending, but such fiscal policy has its limits given the already high U.S. budget deficit.  Congress doesn't have much appetite for additional stimulus spending as voters are sending a message with every primary that they expect responsible decision making in Washington.

Now we are seeing currency considerations getting more attention.  The general idea is that every country wants its currency to go down to help growth by making exports cheaper to foreign customers with the stronger paper.  The U.S. continues to pressure China to allow its Yuan to strengthen.  Japan recently intervened with significant dollar purchases to try to slow yen appreciation versus the dollar.

It all gets very confusing, but one thing is clear.  If everyone tries to cheapen their currency relative to other countries then no one wins such a race to the bottom.

Wednesday, September 15, 2010

August 2010 Market and Planning Update (Posted to our blog two weeks after sending to clients.)

It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena…o that his place shall never be with those cold and timid souls who neither know victory nor defeat.  Theodore Roosevelt, 26th President of United States


PLANNING COMMENTARY

100 years ago people were very obviously facing challenges- economic and other- much like they do today. Roosevelt was very wise to point out the fact that facing those challenges head on is what we should all strive to do. We would further this thought with one of our own- if one decides not to face those challenges (note that doing nothing is a decision) and “stick their head in the sand” they will most certainly fail.

This speaks very strongly to planning for one’s financial future. There are those that decide to ignore the future and its challenges while crossing their fingers and hoping that “it will all work out.” Then there are those individuals that are proactive about their financial life and goals by seeking out more sophisticated solutions to the challenges they face.

In addition to jumping into the arena (we would equate this with getting started with wealth planning) Roosevelt points out that one must “actually strive to do the deeds.” We would equate this with preparing written action items as part of the plan to ensure the appropriate actions are taken (not only discussed). We’ll keep working hard to help our clients recognize their challenges and overcome them with proactive action and advice.

MARKET COMMENTARY

Markets for August were much like the quote to start this letter. Investors generally did not want to get “in the arena” and could well be characterized as “timid souls”. The S&P 500 ended the month down about 4% leaving it down year-to-date by a similar amount as investors continued to avoid the risk of equities and instead sought the perceived safety of government bonds.

The inflows to bonds left the yield on the 10-year U.S. Treasury bond for August month-end just under 2.5% (this same bond was yielding 4% in April of this year). At the same time the price-to-earnings (PE) ratio for the S&P 500 is now under 12x (using forward 4 quarters estimated earnings). The stock yield is seen as the inverse of the PE or 1/12 which expressed as a percentage yield is over 8%. Many market observers are now pointing to the present gap between stock yields and the 10-year treasury yield as evidence of significant valuation opportunity for the owners of stocks. This strong argument for valuation has seemingly been more than offset at present by worries over the economy with the result being the August market declines.

In July Payne Wealth Partners moved our portfolio allocations to neutral, being the mid-point between our highest and lowest allowable allocation to equities for any particular risk level. This change was made based upon the attractive equity valuation argument, as prior to this we were under-allocated to stocks. We still believe this is appropriate as we observe money in markets we would characterize as “fearful” continuing to flow to bonds and wonder when those funds will return to stocks and push prices up.

We also continue to believe in the economic growth and strong currency story of the emerging markets, resulting in significant allocations in client portfolios to both stocks and bonds of emerging market countries including China, Brazil and India. Demographic forces generally favor these countries with younger workers who are improving their economic circumstances and will expand their consumption of goods and services.

Payne Wealth Partners will continue to work to stay “in the arena” by helping our clients make important planning steps and maintain the appropriate diversified portfolios in these challenging times. As always, we thank you for your trust in each of us and in Payne Wealth Partners.

Friday, September 10, 2010

Shelf Life

One of the biggest risks anyone faces within their financial plan is longevity. The chances for maintaining financial security naturally decreases as one lives longer. In the real world none of us knows what our expiration date is. One tool we can turn to when trying to determine our “life plans”- whether those be financial related or a “bucket list”- is the averages. Sure, it’s not perfect, but at least it gives you a sense of what you and your family should be prepared for.

For example, take a couple where the husband is age 75 and the wife is 74. There is a 54% chance that at least one of them will live to see 90. What about the century mark? There is almost a 10% chance that one of these individuals will see 100. Of course it’s the chance that either spouse attains these ages that most couples are concerned with- they want to ensure there are funds available to support both of them until the second death.

These statistics are based on a life table developed in 2004 by actuaries given historical data at that point in time. This does not compensate for healthcare improvements and general lifestyle awareness which will continue increasing these odds as the average life expectancy is extended due to these trends.  This is certainly a key item to consider as one makes decisions affecting their long-term plans.

Friday, September 3, 2010

Market Weakness and 529s

Many of our posts focus on the investment markets, the economy, and global events, however these are usually issues we and our client's cannot control or predict consistently.  This is part of the reason being proactive about one's planning is so valuable- doing the things we can control (and doing them correctly) is critical to long-term success. 

An area with growing importance is 529 accounts and general college planning.  As costs skyrocket and advanced education becomes more critical to future careers, the 529 can be one of the most powerful (and important) accounts on a young families balance sheet (or for grandparents saving for grandchildren).  When investment markets are low and assets are potentially underpriced, a contribution of cash to a 529 is very opportunistic.  The primary reason?  Future earnings are tax-free to the extent they're used for college education expenses. 

We can't control what the market does day to day, but we can identify the opportunities it presents and take advantage of them.