U.S. 4th Quarter 2009 GDP Growth Surprises at 5.7%

The Commerce Department announced their "advance" GDP growth rate for 4th quarter at 5.7% this morning.  Expectations had been around a consensus number of 4.5%, so this was a positive surprise.  Much of the strength came from cyclical recovery in inventories (i.e. companies quit letting inventory levels just decline and instead increased production to replenish inventories).

While GDP 4th quarter strength is a plus, it comes against the backdrop of significant structural challenges in the U.S. and worldwide economies.   Examples of these challenges are timing and methods of removal of low interest rates and other stimulus by the Fed, possible long-term increased savings (and resultant consumption reduction) by U.S. consumer, and effect of eventually addressing U.S. and other developed countries budget deficit.

We'd conclude these comments with applause for today's GDP announcement accompanied by recognition that the private sector will need significant strength and resilience as we address a variety of sizeable challenges.

Roth IRA Conversion Opportunity in 2010

In the past anyone with income over $100,000 could not perform a Roth IRA conversion. Effective January 1, 2010, the income limitations for this strategy have been removed. Bill Gates could do a Roth IRA conversion in 2010 (and almost certainly will)!

There are many key steps to doing a Roth IRA conversion properly. Perry Moore, our Director of Wealth Planning, has written an extensive white paper on the considerations surrounding a Roth IRA conversion. This white paper is available to those who contact us via our website at http://tiny.cc/AiO9h .We’ll be confirming contact data with you before sending out, so that we know we aren’t training our competition.

Recovery.gov

On February 17, 2009 President Obama signed into law the American Recovery and Reinvestment Act of 2009.  The stated goal of this legislation was to stimulate our economy via spending, benefits and tax cuts.  The total dollar value of the bill was $787 billion.

Here we are almost precisely 11 months later.  If  you visit the website set up for tracking this bill at http://www.recovery.gov/ you will see that as of January 8, 2010 about $260 billion (33%) of the total has been paid out (must add 3 numbers under "overview of funding" to arrive at this).

We have a few observations:  (1) Our $14 trillion economy has yet to recognize the growth associated with remaining $527 billion which is equal to over 3 1/2% of our total economy so economic growth will be supported by this in 2010 (especially the first half), (2) the private sector will need that much more recovery to continue to grow after this stimulus is fully spent, and (3) the U.S. borrowed all of the money for this stimulus and will have to repay this someday.

December 2009 Market Update (Posted to our blog two weeks after sending to clients.)

“Economics is extremely useful as a form of employment for economists”

John Kenneth Galbraith, famous economist

As we write this on December 30, 2009 the U.S. stock market as measured by the S&P 500 is up 28% for this year (and up 69% from the lows in March). Economists and market “experts” are debating what will happen to the economy and the stock market in 2010. All have an opinion, none know what will occur. It would be instructive for these experts to present both their forecast for 2010 and at the same time present exactly what they were saying at the U.S. stock market low in March of 2009. To measure up to what we expect of others, here is what we wrote to clients on March 3rd, 6 days before the lows were reached:

“Certainly there is much to give investors legitimate concern, particularly in the short-term. And this may mean continued stock price weakness for a period of time. However, we see a stock market that is very cheap as compared to things like book value and earnings of companies…...We certainly recognize that people are hurting. This economy is resulting in job losses that are certain to continue. Investment accounts are down significantly. People are reducing their spending which protects their individual situation, but damages the overall economy. In the midst of this we counsel a level-headed and long-term approach to decision making. Those who do will see significant long-term returns from these levels, we believe.”

While we profess no skill at calling the market bottom, we do think that our reasoned approach was proper counsel to our clients at a very tough time.

There have been several other key areas of strength in 2009, in addition to the U.S. stocks as described above. Some of the highest returns have been in emerging market stocks and high yield bonds. The MSCI Emerging Markets is index up about 78% year-to-date and up over 110% from the March lows. High yield bonds have returned over 50% year-to-date. Both of these areas represent situations where indiscriminate selling in 2008 and early 2009 by market participants who were forced to deleverage, or who were merely fleeing perceived risk, pushed prices to a level that created tremendous return opportunity. Those investors who correctly identified the mispricing caused by this selling and instead chose to establish or increase positions in emerging market stocks and high yield bonds (Payne Wealth Partners would count ourselves among this group) benefited greatly in 2009.

Payne Wealth Partners has no specific forecast for 2010. We would categorize such forecasts as somewhat of a “fool’s errand”. However, we do have themes (both investment and planning related) that we have espoused over the past 12 months or more, and would restate and expand on some of those here:


• There exists substantial government stimulus in the U.S. and around the world such as extremely low central bank target interest rates, government purchases of their own debt issuances and government spending programs. None of these programs can exist for the long-term; instead they were created to support markets and economies in a time of trouble. The world must still transition from these programs to where the private sector stands on its own two feet. Much risk exists for both the timing and process of such a transition.


• The next several decades would seem to favor the emerging economies of countries like China, India, Brazil and others. These countries do not have the huge budget deficits of the U.S. and other developed countries. These emerging countries also have more favorable demographics in terms of age (median age in U.S. is 37 years while median age in India is 25 years) and more opportunity for growth from lower economic levels (GDP per capita in U.S. is $47,000 while in China is $6,000).


• Consumers in developed countries, including the U.S., recognize that they have over-spent, over-borrowed and under-saved over the past many years. We believe there will be a long term trend to correct this with more controlled spending, debt repayment and increased savings. Worldwide markets that were selling into this past excess consumption will need to transition to find their growth in the opportunities associated with growing wealth of consumers in emerging countries.


• Wealth planning is more critical for individuals and families than ever before. U.S. baby boomers who were the excess consumers of the past must now figure out how they can retire with security, educate their children (or grandchildren) and maybe leave something to their heirs. Those who have significant levels of wealth know that income tax rates must go up in the future to deal with huge budget deficits and have the further challenge of determining what type of estate planning to implement. Strategies with unusual names such as Roth IRA conversions, Grantor Retained Annuity Trusts (GRAT) and Intentionally Defective Irrevocable Trusts (IDIT) are becoming cocktail party talk for the successful. To us at Payne Wealth Partners, the solution for these challenges rests in an annually updated wealth plan and working in concert with key legal and accounting professional counterparts in strategy identification, design and implementation.


2009 has been a year of joining with our clients in facing critical challenges in both investments and planning. We don’t expect 2010 to be any easier, but we look forward to it with eager anticipation. As always we are grateful for you our client and the trust you place in each of us and our firm. We are also grateful for each member of the Payne Wealth Partners team who is critical in the service we provide:

T. Taylor Payne, CPA/PFS, CFP®, President, Wealth Manager
Chad A. Sander, CFP®, Vice President, Wealth Manager
Ann A. Pendley, CFP®, Wealth Manager
Perry Moore, CFP®, ChFC®, Director of Wealth Planning

Terry Prather, ChFC®, Wealth Planner

Kelly Mitchell, Office Manager

Lori Wathen, Administrative Assistant

All of us at Payne Wealth Partners join in wishing you and yours a Happy New Year!

Federal Reserve members don't all agree as to future stimulus

Today the Federal Reserve released minutes of the meeting of the open market committee held December 15-16, 2009. It was interesting to note in these minutes that "a few members" were concerned about planned withdrawal of stimulus via ending purchases of securities related to the mortgage market and "observed that it might become desirable at some point in the future to provide more policy stimulus". Contrast this with somewhat the opposite view held by "one member" who "thought that the improvement in financial market conditions and the economic outlook suggested that the quantity of planned asset purchases could be scaled back, and that it might become appropriate to begin reducing the Federal Reserve's holdings of longer-term assets".

We have written before how challenging it will be for government policy makers to determine how and when to remove stimulus. The Federal Reserve minutes just demonstrate that there are a variety of opinions even among those key policy makers on how to proceed. Getting this just right will be almost impossible. We continue to be of the opinion that the U.S. government will err on the side of overstaying stimulus, thus laying the groundwork for future inflation; however, this all remains to be seen. The potential for some type of policy mistake would seem to be quite high.