The Fiscal Cliff

It is looming!!!  In his recent congressional testimony, Fed Chairman Bernanke stated, “Under current law, on January 1, 2013, there’s going to be a massive fiscal cliff of large spending cuts and tax increases.”  This is the date when the Bush-era tax cuts, the temporary payroll tax cut and extended unemployment benefits are all due to expire.  To make matters worse - since the Congressional Super-Committee failed to reach consensus last year on reducing government spending we will also see $1.2 trillion of automatic spending cuts begin on the same date.  Combining tax increases with spending cuts could push our economy back into recession.  It is anticipated that economic output would be reduced by 3.5% next year if all these things come to pass.  

We remain hopeful that a more thoughtful approach is taken regarding spending and tax cuts by Congress and the President prior to meeting the fiscal cliff Chairman Bernanke speaks of.  However, the risk of policy errors and continued political dysfunction, particularly in an election year, remains very high.  We will continue to monitor these issues closely as the year progresses.        

Is Your Credit Card Information Safe?

An Indianapolis television station recently reported on the potential risks of RFIDs (Radio Frequency Identification) on credit and debit cards.  Cards containing this electronic chip are designed to be a faster method of payment by allowing the cardholder to simply wave the card in front of a scanner instead of the “old fashioned” swipe method. 

In the investigation (which can be viewed at http://www.youtube.com/embed/lLAFhTjsQHw), we see on camera how easy it can be to obtain someone’s credit card information – without even touching the cardholder or the card – and then create a clone card to use for purchases.  Even more alarming is the fact that the individual mimicking thievery in this report purchased the equipment online for less than $100. 

The youtube video above describes how to determine whether your card contains a RFID chip.  As technology advances in our society, additional risks will become apparent.

What Does Warren Buffett Think about GOLD?

Through various media outlets today, we are bombarded by offers to sell us gold.  In his recent 2011 shareholder letter, Warren Buffett explained in great detail his thoughts on investing, the definition of risk and the role of various types of investments in a portfolio.  We thought his comments on unproductive assets, like gold, were very insightful, so we would like to share his thoughts with our readers.  Buffet focuses on the Tulip mania during the 17^th century and the last two major US financial bubbles to take a serious jab at the precious metal. 

In Buffett’s words:

“The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else – who also knows that the assets will be forever unproductive – will pay more for them in the future.  Tulips, of all things, briefly became a favorite of such buyers in the 17th century.  This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further.  Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it even more avidly in the future.”

“What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct.  Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while.  Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices.  In these bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market, and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling.  But bubbles blown large enough inevitably pop.  And then the old proverb is confirmed once again:  ‘What the wise man does in the beginning, the fool does in the end’.”

March 2012 Market and Planning Update

TAX TIME TRAUMA

During the time period we all affectionately call “tax time” there are many important decisions related to one’s finances. Some of these decisions must still be made for the previous year (like whether to contribute to an IRA and what type) yet so many more deal with the year ahead. It is critical that all options be evaluated and that no stone go unturned. READ MORE

MARKET COMMENTS & OBSERVATIONS

We saw many market indexes take a breather during March from their robust gains of the past several months. Out of the five financial market indices represented below, the S&P 500 index was the only one to post a positive gain this past month. It is noteworthy that the S&P 500’s gain of 12.6% for the first quarter of 2012 is its best first quarter return since 1998. Stock prices have appreciated significantly in a relatively short period of time thanks to continued easy money policies by central banks, healthy corporate balance sheets and better earnings, and a gradually improving economic picture. Only time will tell if the recent rally in stock prices has run its course. READ MORE