Thursday, April 29, 2010

Washington D.C. vs. Brasilia, Brazil

The Federal Reserve Open Market Committee met in Washington D.C. this week and issued their statement yesterday saying conditions "warrant exceptionally low levels of the federal funds rate for an extended period."  Those exceptionally low rates are 0% to .25%.  The full statement of the FOMC can be seen at http://tiny.cc/tqs22.

The Central Bank of Brazil Monetary Policy Committee (COPOM) also met this week, in Brasilia, and given the strength of their economy and their concern over inflation increased their rate target to 9.5%.  The full statement of the COPOM can be seen at http://tiny.cc/ex27j.

Our conclusion:  Brazil has a lot of strength in their economy as compared to the U.S.  Investors should consider the above comparisons when determining where to allocate their investment monies.  In this new era, emerging economies such as Brazil have much to offer.

Monday, April 19, 2010

Goldman Sachs- the SEC tries to create a villian

Last Friday the Securities Exchange Commission filed suit against Wall Street firm Goldman Sachs claiming that the firm did not properly disclose to buyers of a specific "synthetic CDO" investment that there were parties betting the other side of the February 2007 deal.  Surely the SEC knows that when such a synthetic instrument is created there are buyers on the "long" side and sellers on the "short" side (or the broker itself is acting as principal and taking a side of the deal).  The fact that the deal worked out great for the sellers and horribly for the buyers doesn't mean there was fraud involved.  In fact Goldman apparently had a little bit of the long side as they lost $90 million on the instrument involved.

This situation also should be a chance for the investing public to again understand the roles of various players, including firms such as Goldman who serve as broker and often as principal.  Lloyd Blankfein, Goldman CEO was quoted in 2004 to say, "In our market-making function, we are a principal.  We represent the other side of what people want to do.  We are not a fiduciary...we are not managing somebody else's money."

To fuel populist support for financial reform, the SEC apparently wants to cast Goldman Sachs in the role of a villian using the hindsight of a February 2007 trade on a housing market that everyone now knows was already in serious decline.  There is no such villian, simply a trade where the smart money profited enormously while another suffered serious losses, just the capitalist system at work.

The investing public should take this opportunity to again remind themselves of the various roles of different parties.  As Mr. Blankfein says, a broker is not a fiduciary (remember a fiduciary is one who is legally charged to act in the best interest of their client).  Just because someone calls themselves an adviser, doesn't mean they are acting on your behalf.  Just ask the investors who purchased the above referenced synthetic CDO with Goldman Sachs as their adviser.

p.s.  We  remind all that Payne Wealth Partners is a fiduciary and we take very seriously our obligation to act in the best interests of our clients.

Thursday, April 15, 2010

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

“The world is full of people who know the
price of everything and the value of nothing.”
 Oscar Wilde, 19th-century writer

The U.S. stock market (as measured by the S&P 500 index) closed the 1st quarter of 2010 up about 5 ½% year-to-date and up about 70% from the low reached a little over a year ago on March 9, 2009. We can’t resist going back to what we were saying in this same communication sent at the end of March 2009 where we made what turned out to be a prescient comment “some positive evidence has emerged that shows we may look back at the 4th quarter of 2008 and the 1st quarter of 2009 as the low point in this recession.”

The problem for many investors a year ago was that they were bombarded daily with media reports of stock price declines- being human beings they responded emotionally by selling to avoid further paper losses versus recognizing the value opportunity at such low prices. Mutual fund money flows are very instructive in terms of what happened here where 2008 and 2009 saw combined domestic stock fund outflows of $181 billion while bond funds for the same period had inflows of $304 billion.

Now let’s consider current times. Although the economy and the markets have recovered nicely over the past year, we remain concerned with several key items that have worried us for some time, including:

• The U.S. (and most other developed nations) incurred tremendous amounts of debt in dealing with the credit crisis. Further, these same countries have a high level of purely structural deficits that exacerbate these debt problems.

• As the U.S. issues additional debt it fuels the concerns of purchasers of that debt which will eventually cause interest rates to rise. It is notable that 10-year Treasury rates that were 2.75% a year ago now stand at 3.83%.

• As government policy stimulus is removed worldwide, it remains uncertain whether or not the private sector can continue to grow in a healthy manner.

One example of U.S. government policy stimulus removal is the March 31, 2010 end of the Federal Reserve’s program of purchasing $1.25 trillion of residential mortgage-backed securities. While this program was in place it supported low levels of home mortgage interest rates, which many observers feel will now increase as much as 100 bps (1%) from present levels.

A key question going forward can be summarized as “will the U.S. and other worldwide economies have the ability to generate healthy growth on their own, as government subsidy of different types is removed?” At Payne Wealth Partners, we believe the answer is “it depends.” If only evaluating economies of developing countries such as China, India, Russia, Brazil and Mexico, we say “yes” these economies can grow in a healthy fashion. But for the U.S. and other developed countries the answer is much less clear to us. Some forecasters see healthy developed economy growth, but many see much more anemic growth. If the answer turns out to be that developed countries (including the U.S.) are in fact economic growth laggards, then the prospect for corporate profits and therefore stock prices would be challenging. Further, poor economic growth and continuing high budget deficits and resultant debt levels for such developed countries could well mean higher interest rates as markets recognize their “debt trap”.

Payne Wealth Partners is making no changes in client portfolios at this time, however we see an increasingly attractive case for moving up portfolio targets for bonds issued by government issuers we believe have a good and improving national balance sheet, such as Brazil and Mexico (we presently have 5% targeted for this area). Further, we believe the case for commodities is improving as those would be a good hedge against currency devaluation from excessive developed country debt issuance while commodities would also be expected to benefit from emerging country economic growth. We will continue to evaluate these and other possible changes to client portfolios as the path of economic recovery and growth becomes clearer.

Our firm also believes we should be commenting in these monthly letters to clients on matters related to wealth planning. As we have evolved to provide a majority of our clients with comprehensive services that include planning, we want communications to our clients to properly reflect the importance we place on wealth planning opportunities. In this month’s letter we want to address estate taxes.

As of January 1, 2010 the federal estate tax was eliminated. This applies to those dying in 2010 only. As the law is currently written, on January 1, 2011 federal estate taxes return for those dying with estates valued in excess of $1 million. One of the biggest moral issues this situation presents is the incentive for someone with a very large estate to die in 2010 and avoid federal estate taxes that can be as high as 45%. While this may be hard to imagine, there have already been numerous cases reported of families making questionable decisions as to wealthy relatives on life support and in critical condition. These provisions were part of legislation passed in 2001 and we were very surprised that Congress didn’t act prior 12-31-09 to correct this. Further, we would have thought that 2010 would have seen a timely solution to this problem with the resolution being retroactive to January 1, 2010 but have yet to see any action taken.

So here we are now having completed the first calendar quarter of 2010 and still no estate tax fix. To us, this is a major failure of this Congress. Our hope and expectation is that Congress will soon take up this issue and clarify the estate tax rules. When they do, individuals will need to evaluate how the new rules affect them and determine if any changes are required to their current estate planning documents. If Congress simply lets the present law continue as-is, this too should be addressed by individuals in evaluating their estate plan. In any event it is something we should all have on our radar going forward in 2010.

Wednesday, April 14, 2010

Complacency?

Merriam-Webster defines complacency as "self-satisfaction when accompanied by unawareness of actual dangers or deficiencies."  This may fit the average institutional investor who according to a recent survey by Citigroup have a consensus of S&P 500 return for 2010 of 11% with a greater chance of a sharp upside move than one that is sharply downward.

A few facts:   Dow Jones Industrial Average (DJIA) close on Friday, September 12, 2008 (before the Lehman Brothers bankruptcy announcement over the weekend) was 11,422.  The DJIA then bottomed on March 9, 2009 at 6,547 and has since recovered to yesterday's close of 11,019. 

There were certainly bargains to be had by purchasing (or even holding) at the lows, but what about now?  We see much to challenge returns over the next many years, including huge levels of global debt and a retrenching consumer.  In our view a well diversified portfolio that doesn't merely count on returns from an increasing stock market is more important than ever.  We caution all, starting with ourselves, not to let the significant recovery in stock prices dull our senses as to the risks going forward.

Wednesday, April 7, 2010

Retirement Confidence

The Employee Benefit Research Institute, a private nonprofit organization committed to public policy research, recently released their annual Retirement Confidence Survey http://tiny.cc/ewk78 . The survey is designed to gauge Americans’ views and attitudes of retirement and related issues. Many of the findings are alarming: 16% of workers are very confident about having enough money to retire comfortably and 66% of workers have total savings of less than $50,000.

To make matters worse, the traditional “three- legged stool” providing retirement savings (pension, social security, individual savings) is increasingly becoming a single peg that stands for “I” (i.e. “I” am solely responsible for my retirement success or failure!). However, even though they have a growing responsibility for funding their own retirement, less than ½ of workers have ever tried to calculate what they will need for retirement.

It would seem the importance of intense, comprehensive planning is more crucial now than ever. Hopefully the high percentage of American’s “guessing” what they’ll need to accomplish their goals as identified by this study will hear the wakeup call soon.