"The fact that a great many people believe something is no guarantee of its truth."
~W. Somerset Maugham
May 21, 2010
To Our Investor Clients:
Once again, the headlines are screaming uncertainty at us and the markets are gyrating in response. Whether we are battling the effects of an incredible oil spill, the failures of the European socialist state, our own slow moving economy or debating new immigration laws in Arizona, what remains the same is the uncertainty of our future. Americans can realistically wonder if our leadership "gets it" and is ready to respond with new ideas for new jobs, new security measures, an improved environment and the energy solutions for our future. Here are some recent headlines to consider:
OUR BIG, FAT GREEK MELTDOWNInvestment News, May 10-14, 2010
If you had gone out for a late East Coast lunch on May 6, you would have missed the sickening 900+ point plunge in the Dow. Within a week, the whole episode has a sort of surreal quality about it. The plunge, which became known as the "Flash Crash" ended up actually generating a vibe of optimism which then pervaded the markets, driving the Dow back towards the 11,000 level it reached in April, but that candlestick chart for May 6 reminds us that things may be more fragile than they sometimes seem. Regulators and experts are still trying to piece together exactly what happened: what combination of actual news, hedge fund trade orders, data errors, general psychology and other factors combined to suck share prices into that death-defying vortex and then right back up again?
At any given time there are numerous actual and potential events taking place that, alone or in combination with others, have the potential to disrupt markets. If we sat down and made a list today we could probably come up with over 500 macroeconomic, geopolitical and socio-cultural factors that on any given day could trigger a market rally or a huge selloff. That would only be the tip of the iceberg - things we could actually articulate, as opposed to unseen variables randomly popping into and out of existence like so many quantum particles. The problem with trying to translate the impact of these variables into short-term market tactics is that we never know which ones are going to have an impact, when they will have an impact, and how the market will ultimately react.
FED GOVERNOR SAYS U.S. COULD FEEL EUROPE'S PAINNew York Times, May 21, 2010
The Problem: Greece, and some of its neighbors, are all carrying enormous debts. Greece owes $236 billion, which believe it or not is the smallest debt among the five now infamous European countries. Portugal's debt stands at $286 billion - and it owes roughly a third of that to Spain. Spain carries around $1.1 trillion in debt, and its economy is in horrible shape (20% unemployment). According to the Bank for International Settlements, it owes $220 billion to France and $238 billion to Germany. Ireland has $867 billion in debt, with about 40% of that owed to the U.K. and Germany. Italy owes $1.4 trillion, including $511 billion to France (almost 20% of France's GDP). In the years since the establishment of the euro, Greece's debt-to-GDP ratio has remained above 100%. Many economists think Greece will go into a deep recession (or depression), which could last most of the decade. Greece's economy is very small.
Europe's biggest banks are heavily exposed to these debts, and so are some of ours: names like Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase, and Morgan Stanley. In fact, these five banks have $2.5 trillion of cross-border exposure in the crisis, with Citigroup the most exposed. So you have potential risk to these banks, the euro, and the European and world economy. "We're now in rescue mode," said Carl Bildt, Sweden's foreign minister.
Testifying before the Financial Services Committee of the US House of Representatives, Daniel Tarullo, President Obama's first appointee to the Federal Reserve's Board of Governors, speaking about debtstricken European countries, said, "Their experience is another reminder, if one were needed, that every country with sustained budget deficits and rising debt - including the United States - needs to act in a timely manner to put in place a credible program for sustainable fiscal policies,". Mr. Tarullo laid out how that contagion could spread. If sovereign debt problems were to broadly affect Europe, American banks could face large losses on their overall credit exposures, as asset values declined and loan delinquencies mounted. Money market mutual funds that hold commercial paper and certificates of deposit issued by European banks also would be hurt. The result could be a further contraction in bank lending. "Although we view such a development as unlikely, the swoon in global financial markets earlier this month suggests that it is not out of the question," Mr. Tarullo said.
So what does this mean for all of us? The value of the Euro currency, on its own and in tandem with our own dollar and other currencies has a lot to do with the growth prospects of the global economy. Given how much of our own economy is based on shipping goods and services overseas and importing them back, our own economy can be expected to recover or stall based in large part on how Euroland is recovering. Certainly, investments in foreign companies, mostly those of developed nations, have suffered from this debt crisis in Greece and elsewhere throughout the Euro Zone. Only Germany seems willing to act responsibly, and it will likely become politically unacceptable for the population in Germany to support austerity programs at home if they are not seeing similar cutbacks in social benefit programs in Greece, Italy, Portugal and Spain.
The world is on a journey to an unstable destination, through unfamiliar territory, on an uneven road and, critically, having already used its spare tire." According to Mohamed El-Erian, who with Bill Gross runs PimCo.
IS A WEAK DOLLAR A GOOD THING OR A BAD THING?| Pros | Strong Dollar
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US INFLATION AT 44-YEAR LOW AS RETAIL PRICES FALL
New York Times, May 19, 2010
Consumer prices fell in April for the first time since early last year, and inflation rose at its slowest rate since the 1960s, a new government report said. "I think what you are seeing is a continuation of a very soft trend," said Michael Feroli, chief United States economist at JP Morgan Economics. "And there is no evidence that it is about to turn around any time soon." Altogether, the figures suggested the government would be under no pressure to raise benchmark interest rates to curb inflation according to Gregory Daco, the United States economist for IHS Global Insight.
"This month's low reading of the core inflation index is a clear indication that the Fed should continue to promote a very accommodative monetary policy stance," said Mr. Daco in a research note. "With no signs of inflation on the horizon, the Fed should continue to support the economic recovery by keeping rates exceptionally low for an extended period of time."
For some time now, VPA has been carefully watching for signs of inflation in our economic picture. We have drastically cut back on inflation protection investing although we continue to believe it will be impossible to know when exactly higher inflation will kick in. Although recent oil price declines have taken some of the froth off gasoline prices, we have all certainly noticed our charges have increased to fill our gas tanks. With housing continuing to be a depressed sector of the economy alongside the lack.
of new job growth, inflation from companies raising prices seems unlikely in the near term. I recently spent time with a business leader running a furniture company, a business sector heavily dependent on the housing market. He told me 2009 was a breakthrough year and he is finally seeing his customers, large retail furniture stores, restocking their inventory. That sounded hopeful. But he also told me he solely imports his furniture from China, Viet Nam, Indonesia and now Malaysia. Not a good sign for longer term job growth in this country.
PENSIONS GIVE PROPERTY ANOTHER SHOT
Wall Street Journal, April 28, 2010
In a show of renewed confidence in the long term investment viability of real estate, "institutional investors have made some of their biggest recent bets in less risky real estate funds that avoid heavy leverage and invest in less-risky properties". The investments should total nearly $34 billion in 2010 and that is nearly twice the amount invested in 2009. REITs have recovered nearly 140% since their low points in March of 2009 but remain about 40% below their high point values of February 2007. VPA has been a long-term investor in REITs, both domestically and more recently overseas. While we have not added REITs back into every investor portfolio, we are believers in diversifying in real estate using REITs and see their income stream as becoming more and more attractive if the recovery can be sustained. Recent foreign turmoil has reduced prices in our international REIT fund, but the prospects longer-term remain good. The fact institutional investors such as pension funds, state retirement systems and other large investors are returning to the real estate marketplace is a very good sign of confidence in our domestic recovery.
LAWMAKERS, REGULATORS BACK FIDUCIARY STANDARD
Investment News, May 5, 2010
Lawmakers and regulators are jumping on the fiduciary-duty bandwagon after the Securities and Exchange Commission's fraud charges against Goldman Sachs and subsequent hearings. Several senators have or plan to introduce amendments to the financial overhaul legislation, and SEC Chairman Mary Schapiro has backed the standard. "I believe that broker-dealers and investment advisers providing the same services, especially to retail investors, should meet that same high fiduciary standard," Schapiro said.
Like many fee-only advisors registered with the SEC, reading this news item is almost too good to be true, so we seriously doubt the Fiduciary standard will make it into the final Financial Services Reform Act that will likely pass and become the law of the land. If you were shocked to learn a venerable Wall Street titan like Goldman Sachs was betting against its clients while simultaneously selling them a new product, welcome to our world. For the 25+ years we have been practicing under the Fiduciary standard of keeping our clients' interests first, at the same time and using the same language, Wall Street brokers, insurance companies and every bank on every corner has been calling their salespeople "advisors" and living under a sales standard, to sell products that are "suitable and appropriate" for their customers. Not in the customers' best interests, mind you, just "suitable" for their needs. The forces that drive Capitalism in our country are fighting hard to keep everything exactly the way it is: good for them and bad for the rest of us. Let's watch and see what courage our leaders can muster to protect our interests. At VPA, we'll keep on protecting you the best we can from the forces that caused trillions (that is a "T") to vanish overnight along with millions of jobs and dreams for a sound financial future. Our current recommendation: Stop doing business with these huge banks and move your money out of their accounts. Don't think for a minute that would not get someone's attention.
LONG TERM CARE PREMIUMS ON THE RISE!
Financial Advisor Magazine, May, 2009
John Hancock's Long Term Care (LTC) Insurance rates for new applicants are increasing 19% to 32% effective June 7, 2010. This is clearly a sign of times to come as insurers, those that are still left selling LTC policies, which aren't too many, gather more experience with claims paid ratios and life expectancies and watch their bottom lines more carefully. Every insurance company in the LTC marketplace is struggling. John Hancock also is pulling its "Leading Edge" product, a discounted offering to be pulled from the individual market and used only in group sales. In addition, buying a "Lifetime benefit period" is no longer available.
At VPA, we continually monitor the LTC markets so we are prepared to answer your questions about when the right time is to act and the correct amount of coverage to secure. These are not easy questions to answer, but the headline news about Hancock means it's at least time to consider LTC issues and determine what course of action makes sense in your own financial situation. There remain very few competitors in the LTC marketplace and only relatively short periods of actual claims paying experience to guide the products being offered. But covering what might be life's final illness can be a financially devastating event, so it is prudent to consider transferring some if not most of that to an outside insurer. Let us know if the time is right to have this conversation.
A WORD ON INCOME TAX PLANNING
For VPA, receiving your 2009 income tax return opens the door to opportunity. As your Financial Fiduciaries, we do tax planning all year long, not just in anticipation of December 31st or April 15th. Our tax ideas revolve around a review of your last year's tax return, so we need to receive that to do the Full Monty for you. And what do we look for? For starters, the Alternative Minimum Tax (AMT). If you were subject to paying it, are there ways to defeat it for 2010? Do you have carryforward capital losses that can be used in 2010, and beyond, to shelter realized capital gains. Might we find other investmentrelated tax liabilities we might advise you on to reduce or eliminate those bills for 2010? An example is taxable interest income. Did you maximize your 401K savings opportunity and reach the annual maximum contribution of $22,000? Are you on path to reach the maximum this year? Should you be taking only the Required Minimum Distribution (RMD) from your IRA or should you "fill your income tax bracket" and lock in today's tax rates on a larger sum? Surely we know income tax rates are headed higher when the Bush Tax Cuts are allowed to expire. Capital gain rates will rise. Income tax rates will increase, especially at the state and local levels. We want to be prepared on your behalf, so having your 2009 tax return is the key to that bank of tax savings.
As we approach the summer months, we look forward to meeting with as many of you as possible to ensure you are on your Path to Financial Freedom. We want you to feel that sense of accomplishment that comes from not just having a plan, but executing it well. We want you to have the peace of mind so many of you tell us about that comes from being financially in sync with the lifestyle you want now, and forever. We're here to help and consider it our honor to safeguard that trust and confidence you have placed in us. Please keep an eye on a client satisfaction survey we are renewing. We sincerely want your honest and complete feedback, which can only propel us forward to deliver better service and better results.
Respectfully,
Terry J. Siman, President and Chairman
Vantage Point Advisors Investment Committee
THE MONTHLY INDEX REPORT FOR APRIL 30, 2010
Index |
April |
QTD |
YTD |
Description |
S&P 500 Index* |
1.5% |
1.5% |
6.4% |
Large-cap stocks |
DJIA* |
1.4% |
1.4% |
5.6% |
Large-cap stocks |
Nasdaq Comp.* |
2.6% |
2.6% |
8.5% |
Large-cap tech stocks |
Russell 1000 Growth |
1.1% |
1.1% |
5.8% |
Large-cap growth stocks |
Russell 1000 Value |
2.6% |
2.6% |
9.6% |
Large-cap value stocks |
Russell 2000 Growth |
4.2% |
4.2% |
12.1% |
Small-cap growth stocks |
Russell 2000 Value |
7.0% |
7.0% |
17.7% |
Small-cap value stocks |
EAFE |
-2.1% |
-2.1% |
-1.9% |
Europe, Australasia & Far East Index |
Lehman Aggregate |
1.0% |
1.0% |
2.8% |
U.S. Government Bonds |
Lehman High Yield |
2.3% |
2.3% |
7.1% |
High Yield Corporate Bonds |
Calyon Financial Barclay Index** |
1.6% |
1.6% |
3.9% |
Managed Futures |
3-mo. Treasury Bill |
0.2% |
0.2% |
0.4% |
|
* Return numbers do not include dividends. |
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