Debate and Dysfunction

Although both sides are gridlocked on the debt and budget deficit debate, we believe that our nation’s debt ceiling will ultimately be increased.  There is really no other reasonable choice at this point in time than to increase our country’s borrowing limit.  An actual default on the payment of any of our financial obligations would be disastrous to our economy, our currency and our future growth opportunities as a country.  We believe that our politicians will see the light on this issue and come to an 11^th hour resolution.   

Our leaders must come up with a budget proposal that begins to reduce our deficit and creates a realistic plan for reducing future government borrowing.  All the political wrangling of the past few weeks has brought to light the dysfunction that exists in our government, and it has greatly increased the possibility that the rating agencies will downgrade our nation’s credit worthiness.  Although we would agree that debate is a healthy part of the process, at some point compromise becomes as equally important.    

U.S. Debt Ceiling

The August 2^nd deadline for political agreement on the U.S. debt ceiling is approaching.  Although this ceiling increase issue (which has been quietly done many times in the past) has been overly magnified by the politicians, the issue of ongoing U.S. budget deficits and resultant debt is real and very significant.  The debt ceiling is a sideshow (we feel strongly it will be raised by the deadline); the real issue- can a budget deal show enough credible action to satisfy the credit rating agencies?

June 2011 Market and Planning Update (Posted to our blog two weeks after sending to clients.)

“Planning is bringing the future into the present so that you can do something about it now”

By Alan Lakein, well-known author on personal time management, including “How to Get Control of Your Time” and “Your Life” which has sold over 3 million copies.

PLANNING COMMENTARY

In a 2007 survey of business owners performed by ROCG, an international research and consulting firm, it was determined that the average owner spends 80 hours preparing a business plan and only 6 hours preparing for their exit from the business.  A similar study of retirees performed by AARP in 2010 showed that 43% of Americans spent more time planning their most recent vacation than they have spent, collectively, planning for retirement!  So why do the statistics show such a lack in planning for some of the most important financial and emotional decisions people will make in their entire lives?  Perhaps it is because individuals don’t know the best way to go about planning for these sometimes very difficult transitions.  Options aren’t understood and life is busy for all of us so planning takes the back seat.

In many respects you as our client represent an “outlier” in these studies - you are someone that does not fit the average and is not following the pack.  In fact, due to the proactive wealth planning you participate in you represent the opposite of the average individual represented in these studies.  Because of the time you take each year to go through our planning process and try to “bring the future into the present” we can partner with you to develop steps to take today to improve that future and prepare for your goals.

 

This approach is certainly against the grain - more and more individuals chose (actively or by default) to put their fate in the hands of chance and hope for the best.  Unfortunately hope is not an acceptable substitute for a plan!   Because of continuing tax law changes, domestic budgetary issues, global economic changes and personal finance challenges, proactive planning will continue to be an important part of finding success for all of us.

INVESTMENT COMMENTARY

We’ve continued to see a general pullback in equity markets around the world during the month of June.  The correction in stocks that began in May is due to concerns about our economy, uncertainty over whether Congress will raise the debt ceiling, and fears about Greece defaulting on its debt.  Bond indices have held up better and were flat to slightly positive for the month. 

Provided below is a chart showing the performance of a variety of equity and bond indices.

Financial Market Indices	June 2011	Year to Date	Last 12 Months
S&P 500 TR (US Stocks)	- 1.7%	6.0%	30.7%
MSCI Developed EAFE (foreign stocks)	- 1.2%	5.3%	30.9%
MSCI Emerging Mkt Equities (emerging country stocks)	- 1.9%	- 0.4%	25.0%
Barclays Capital Aggregate Bond – Intermediate Term	- 0.1%	2.7%	4.0%
Barclays Capital Municipal Bond Index	0.3%	4.4%	3.5%

Discussions in our recent investment committee meeting centered on the following beliefs which weigh heavily in our asset allocation strategies:

•           Although our economic recovery has softened, we think it is highly unlikely that we will experience a double-dip recession.  This is due to the fact that the four most economically sensitive areas of our economy (auto sales, housing starts, inventories and real capital goods orders) are still near their recession lows.  It would be hard for these areas to collapse again when they are still in the basement. 

•           US stock market valuations are attractive.  The forward Price to Earnings Ratio of the S&P 500 is 12.3; whereas, the long-term average has been 16.5.  The lower the number - the cheaper the market.

•           At a yield of 3.1% on the 10 year US Treasury Note, government bonds are unattractive.  We believe this is especially true given our government’s increased credit risk and likelihood that the next major move in interest rates will be up.

•           The US dollar is likely to continue weakening over time versus the currencies of many emerging economies.  

•           Emerging market equities offer longer-term growth advantages when compared to the US or other developed markets.  However, this is not a risk-less area and could still be subject to more volatility.   

•           Diversification is more important than ever as we are likely to see continued anemic economic growth from the US and Europe.  The slower economic growth coupled with debt and budget problems could lead to increased volatility in the financial markets. 

•           Moderately higher inflation is now more of a risk than deflation.  The US and Europe continue to follow easy-money fiscal policies and there is a supply/demand imbalance in many commodities being driven by emerging market growth. 

We continue to advise following a disciplined and well-diversified investment strategy.  Rest assured that we will continue to look for tactical investment opportunities as certain asset classes may reach extreme levels of overvaluation or undervaluation. 

EMPLOYEE ANNOUNCEMENTS

At Payne Wealth Partners we encourage our employees to academically challenge themselves and strive to obtain the highest levels of professional designations.  With this principle in mind, Chad A. Sander, CFP® and Bethany Muensterman have enrolled as 2011 Level I Candidates in the Chartered Financial Analyst Program (CFA).

The CFA Program is a self-study, graduate-level program that requires candidates to learn and apply investment knowledge.  It links theory and practice with real-world investment analysis, valuation, and portfolio management, and emphasizes the highest ethical and professional standards.  The CFA designation is recognized globally as the gold standard investment credential.   To earn the CFA designation, candidates must pass three rigorous exam levels (successful candidates report that they study at least 300 hours for each level), meet the work experience requirements of four years in the investment industry, sign a commitment to abide by the CFA Institute Code of Ethics and Standards of Professional Conduct, apply to a CFA Institute society, and become a member of CFA Institute.  To give you a sense of the challenge Chad and Bethany have taken on, only one in five people who begin the program ultimately earn the right to use the the designation.

European Sovereign Debt Concerns

Interest rates have risen recently on the government debt of Italy and Spain.  As of the market close on Monday July 11, the 10-year government notes for Spain were yielding 5.9% while Italy's 10-year yield was 5.5%.  Compare these rates to the 10-year German bund rate of 2.8% at Monday's close.

When it comes to debt problems Greece has been the European country in the headlines.  We must understand that Greece is a relatively small country with a population of 11.2 million, a GDP of $318 billion and total public debt of $450 billion.  Greece is a real problem, but still we must recognize it represents only 2% of the European Union (EU) GDP.

Unintended Consequences

The Pension Protection Act of 2006 was designed to shore up our private pension system.  The law included a key provision, auto-enrollment, to encourage wider participation in company sponsored 401(k) plans. Under the law, companies are allowed to automatically enroll their employees in their retirement plan instead of having them sign up on their own.  We believe this was initially a good idea in a country where most aren’t saving enough towards their retirement.  Today, employers who offer auto-enrollment report participation rates above 85% compared to 67% for those plans without auto-enrollment, according to Aon Hewitt, a human resources consulting and outsourcing company.