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Sequestration Hurting Stock, Bond Markets? Not At All…


Will sequestration hurt the stock and bond markets? Not this month, when the budget cuts are scheduled to take effect. What about the economy? Probably not that much either, according to prognosticators.

The sequestration cuts themselves are actually quite tiny. Total federal spending in 2012 was $3.53 trillion. President Obama’s budget request for 2013 was $3.59 trillion. Under sequestration, total federal spending in 2013 would be $3.55 trillion, an increase of only $25 billion, a little less than 1 percent, according to the Congressional Budget Office (CBO).

Did you catch that?

“Under sequestration, total federal spending goes up, just by less than it would have gone up without sequestration,” says Peter Klein, a University of Missouri economics professor, who also co-writes a blog called Organizations and Markets (www.OrganizationsAndMarkets.com).

The White House and Congress have worried everyone that the sequester will have a terrible effect on the economy, when in fact the economy is humming along just fine.

So far, the stock market has continued to hit record levels in the face of sequestration. And bond-market investors also seem to like the headlines about “debt reduction,” even though with sequestration, there is no real debt reduction.

Instead, there will be a reduction in the rate at which U.S. government debt increases. Even with sequestration, there is a projected budget deficit – the government will spend more than it takes in – every year until 2023.

And the American public likes sequestration, given the feeling the government needs to stop spending as much, just as citizens are spending less.

“Some actually believe this small measure of austerity, and the world not falling apart, is a good thing,” says Michael Galantino, managing director at Boenning & Scattergood Inc., in West Conshohocken.

The CBO estimates that a fully implemented sequester would result in GDP growth of 1.5 percent – below the pace that would otherwise be expected, adds Brad Sorensen, director of market and sector analysis at the Schwab Center for Financial Research.

Given many analysts’ estimates of 2 percent annual growth, that doesn’t leave a lot of cushion. However, the CBO forecasts don’t take into account potential changes that could result from a given action.

“It’s possible that reduced federal spending and fewer debt concerns could increase business confidence and stimulate hiring, which could help to offset at least some of the [GDP] losses [in the longer term],” Sorensen says.

“The economic impact of the sequester will probably be smaller than the CBO’s forecast, and U.S. growth will remain modestly positive,” Sorensen predicts. “The cuts will be implemented gradually, rather than all at once, which should give the economy time to adjust.”

The U.S. bull market in stocks has vaulted over some impressive hurdles, including last week’s fears of a banking run in Cyprus. And Galantino says the main focus for his clients remains “trying to find yield in a low-yield environment.”

Interestingly, many of his retail clients “are slowly putting more money to work as the confidence returns, and they just can’t take the pain of being out of the market any longer,” Galantino said.

And that typically is not a good sign – more a signal of a short-term plateau in the market.

Read more: http://www.philly.com/philly/business/20130326_Your_Money__Sequestration_likely_will_not_hurt_much.html#ixzz2OeSFatPu


Bear Market Blues: Returns Likely Lower in Future Years

Dealing with the bear market blues


Someone finally said it out loud: The stock market’s annual returns won’t be as rewarding as they have been historically.

Pension funds, institutional investors, and even ordinary folks like us put money in the stock market with the expectation that, over the long term, we can earn roughly 7 percent to 8 percent a year, maybe more. In the bull-market era between 1982-2000, stock returns soared into the double digits.

But this is a bear market. So John P. Hussman, of Hussman Funds, has lowered his expectations.

“We estimate the likely 10-year prospective total nominal return for the S&P 500 to be only 4.8 percent annually,” he wrote in his latest missive to investors (www.hussmanfunds.com).

His opinion aligns with what veteran Dow Theory analyst Richard Russell observed a few months ago: “I’m fairly convinced that this is a legitimate primary bear market. And it will end the way all major bear markets end – with good stocks being tossed into the market for whatever price they may bring.

“The good stocks will be sold last because there will, at least, be a market for them. They will sell below known value.”

Russell put the downside in a fairly wide range that works out to between 28 percent and 56 percent lower on the Standard & Poor’s 500 index, a market benchmark that trades around 1,350.

That means the 10-year projected return for the S&P 500 would be anywhere from 9 percent to 14.7 percent annually, still well below the projected returns that were available between 1973-1984 and the period between 1940-1954.

So what’s an investor to do? We checked in with Ed Lambert of the financial advisory firm Wiley Group, which runs $200 million for clients from offices in West Conshohocken. He advises against socking away cash under the mattress.

Currently, advisers such as Lambert are doing battle against what he calls “the silent killer” – the invisible tax on savers who stick their cash in the bank at 0.3 percent but lose 2 percent every year from inflation.

“If inflation is at 2 percent a year, a basket of goods that costs $100 today will cost $122 in 10 years,” he explains, assuming that rates don’t change. “But you’ll only have $103 to buy that $122 basket” if you leave your money in the bank. “It’s financial repression. The U.S. government is manipulating interest rates, keeping them low to keep the $16 trillion in debt-service costs down. Meanwhile, savers earn less than inflation.”

Wiley Group is putting client money in dividend-earning equity index funds such as WisdomTree LargeCap Dividend Fund (Symbol: DLN), and Schwab U.S. Dividend Equity ETF (symbol: SCHD) an exchange-traded fund seeking to track the performance of the Dow Jones Dividend 100 Index. On the fixed income side, they use iShares Barclays Aggregate Bond Fund (symbol: AGG), iShares iBoxx Investment Grade Corporate Bond Fund (symbol: LQD) and iShares Barclays 1-3 Year Credit Bond Fund (symbol: CSJ). Finally, he recommends a small percentage of a client’s portfolio be in alternatives such as real estate investment trusts and precious metals, such as SPUR Gold Trust (symbol: GLD). A sample breakdown allocation equals roughly 48 percent in equities (large-cap and domestic), 26 percent in fixed income, 16 percent in alternatives and about 8 percent in cash and money markets.


Romney trusts

What’s the thinking behind presidential candidate Mitt Romney’s much-discussed offshore trusts? Jim Duggan, of Duggan Bertsch L.L.C. in Chicago, explains that they are a popular tool for wealthy clients.

“The headlines presume there is some nefarious intent behind Mitt Romney’s trusts, and have speculated that there is no valid reason behind such planning,” Duggan said. However, asset-protection trusts, like those used by likely Republican nominee Romney, “are a prudent part of a well-conceived wealth-preservation plan.”

Duggan explains that the accounts Romney set up are known as Offshore Asset Protection Trusts (OAPTs). “While these accounts have gotten a bad rap, they are perfectly legal,” said Duggan. Asset-protection trusts started out not as a way to reduce or eliminate tax, but about keeping what the client has from civil verdicts. These trusts often have something called a “spendthrift clause,” which says the assets of the trust can’t be used to pay out the claims of beneficiaries’ creditors or lawsuits.


Read more: http://www.philly.com/philly/business/20120724_Your_Money__Dealing_with_the_bear_market_blues.html#ixzz21lNsQALe 

We’re Due For Election Year Rally In Stock Mkt: Philly Inquirer

Your Money: Election year pattern holding so far

Hope trumps fear in election years. At least, that’s the stock-market adage: In American presidential election years, equities historically produce positive returns.

So far in 2012 the election year pattern is holding strong, according to Bespoke Investment Group. The benchmark index S&P 500 has closely followed the typical presidential election-year trading pattern: peaking in April, then falling in June. The coming months before the November election could produce a nice rally.

But does the U.S. economy actually support such an election year snapback? Right now, it’s a toss-up.

“President Obama chose his words poorly when he recently said that the private sector is ‘fine,’ but it is worth keeping in mind that U.S. companies are sitting on record levels of cash and earnings remain strong,” notes OppenheimerFunds chief economist Jerry Webman. “Borrowing is cheap for those with access to it, and we’ve seen commercial and industrial loans climb steadily since late 2010. Small-business optimism, as measured by the National Federation of Independent Businesses, is near its best level of the recovery, though still below precrisis levels, while small-business earnings are the highest they’ve been since 2006.”

With the election just four months away, our focus on economic data will sharpen. Under Obama’s administration, starting with January 2009, here are some numbers that define the state of the economy:

Total nonfarm payrolls have decreased by 1.3 million from December 2008 (134,379,000) to June 2012 (133,088,000). Source: St. Louis Fed.

Full-time jobs, based on the Household Survey, have decreased by 2.5 million from 117,039,000 to 114,573,000. Source: Bureau of Labor Statistics

Part-time jobs, based on the Household Survey, have increased by 1.6 million to 27,894,000 from 26,318,000. Source: BLS.

Food stamp recipients have increased by 14.6 million to 46,18,000 from 31.567 million (as of April 2012). Source: USDA

Disability recipients have increased by 1.3 million from 7.427 million to 8.733 million. Source: Social Security Administration

Over the same time period (42 months since Obama took office), total public debt-to-Gross Domestic Product has risen from 76.7 percent to 101.7.

Don’t trade on ruling

Joseph Costigan, director of equity research at Bryn Mawr Trust, says it doesn’t really make a lot of sense to play the Supreme Court decision on the Affordable Care Act “because it could get reversed.” Moreover, he argues that a lot of the sentiment surrounding the decision has been priced into the market.

Instead, his firm focuses on buying companies that it believes will benefit no matter what happens with the legislated health-care reform. “Even in down markets, good businesses go up.”

Bryn Mawr Trust’s Costigan holds shares of lab testing concern Bio Reference Labs (symbol: BRLI), which is a regional firm with expected earnings growth in the double digits, worth $27 a share, he believes. The investment firm also holds Amgen (symbol: AMGN) and Almost Family (symbol: AFAM) in client portfolios.

Almost Family is a roll-up of home health care businesses around the country, with locations in Florida, Kentucky, Connecticut, New Jersey, Ohio, Massachusetts, Alabama, Missouri, Illinois, Pennsylvania and Indiana, in order of revenue.

Leaving behind legislated health care, Costigan also has been buying international biotechnology concern Mindray Medical (NYSE: MR). The medical-device company recently paid $35.5 million for a controlling stake in Wuhan Dragonbio Surgical Implant Co., a Chinese company that makes trauma, spine, joint and other orthopedic products. Mindray’s traditional areas of business have been patient monitoring, in-vitro diagnostics, and medical imaging. Costigan said he started buying the stock over a year ago, and has a price target of $35 a share, expecting 17 percent annual earnings growth. The stock currently trades at $29.


Read more: http://www.philly.com/philly/business/personal_finance/20120710_Personal_Finance__Election_year_pattern_holding_so_far.html#ixzz20Ey65NUK

Taxes Going Up in ’13, So Book Winners & Losers in Portfolios

Boring, yes, but it’s something we gotta look at in our investment portfolios. My latest for the Philly Inquirer:

Tax-planning moves to consider now before federal rates rise in 2013

Erin E. Arvedlund

Absent some miracle before the end of this year, taxes are going up in 2013.

If Congress does not act, federal income taxes on short- and long-term capital gains in our portfolios are scheduled to increase, from 35 percent to 39.6 percent and from 15 percent to 20 percent, respectively. So are taxes on dividends, scheduled to increase from 15 percent in 2012 to 39.6 percent in 2013, or even higher if you are filing in top tax brackets.

The new rates apply to net investment income for single filers earning more than $200,000 and married couples filing jointly earning more than $250,000.

And now that the Supreme Court ruled that the Affordable Care Act of 2010 is constitutional — on tax grounds, rather than the more expansive Commerce Clause — an additional Medicare tax of 3.8 percent will be imposed on what’s called “unearned income.”

Unearned income means many things (ask your accountant), but it includes such things as investment interest, dividends, capital gains, annuities, royalties, rents, and pass-through income from a passive business and partnerships.

There are some tax-planning moves you can make now to pay a lower tax rate this year and create losses for next year in your portfolio — thus lowering your overall tax bill.

First, consider booking winners in your portfolio in 2012.

In taxable brokerage firm accounts, you could reduce your tax bill by selling appreciated securities this year — instead of waiting to sell them next year and pay a higher tax. “The maximum federal income tax rate on long-term capital gains from 2012 sales is only 15 percent. Now may be a good time to cash in some long-term winners to benefit from today’s historically low capital-gains tax rates,” advises Martin Abo, of Abo & Co. L.L.C., certified public accountants and litigation/forensic consultants.

Second, bite the bullet and sell some loser securities (currently worth less than you paid for them) before year-end.

The resulting capital losses will offset capital gains from other sales this year, including short-term gains from securities owned for one year or less that would otherwise be taxed at ordinary income tax rates.

If losses for this year exceed gains, you will have a net capital loss for 2012. You can use that net capital loss to shelter up to $3,000 of this year’s high-taxed ordinary income from salaries, bonuses, self-employment, and so forth ($1,500 if you’re married and file separately). Any excess net capital loss, Abo says, is carried forward to next year.

Third, reevaluate your investment mix.

Preparing for potentially higher taxes on dividends could include investing a larger portion of your income-producing portfolios in tax-exempt municipal bonds instead of dividend-producing stocks, or buying dividend-producing stocks in tax-advantaged retirement accounts.

Fourth, convert to a Roth IRA.

Converting to a Roth IRA can be a good strategy if you expect your tax rate to be higher in future years. Qualified distributions from a Roth — including the earnings portion — are tax-free, according to the Fidelity brokerage firm.

The downside to converting is that you have to pay tax on the amount of pretax contributions and earnings you convert. But, again, if you make the conversion in 2012, you’ll owe tax at your current rate, not potentially higher future rates.

But what if tax rates don’t go up? You can undo a Roth IRA conversion until Oct. 15 of the year following the conversion year. So if you convert this year (2012) and Congress decides to retain the current tax rates — or even to lower them — you can change your mind by Oct. 15, 2013.

Estate and gift taxes also were part of the Bush-era 2001 tax cuts that were extended until 2013. For 2012, beneficiaries have to pay estate tax on amounts of more than $5.12 million at a top rate of 35 percent. The exemption is scheduled to revert to $1 million in 2013, and the top rate will increase to 55 percent.

Read more: http://www.philly.com/philly/business/personal_finance/20120703_Tax_planning_moves_to_consider_now_before_federal_rates_rise_in_2013.html#ixzz1zlFaPz2f



Investing Ahead of a Fiscal 2013 Cliff; Plus Alerian Stops Issuing Shares

Impending fiscal cliff has financial planners reviewing their options

America’s so-called fiscal cliff is making it hard for investors to plan ahead.

The fiscal cliff is the paradox that Congress and the White House now face: If they pass measures to slice the country’s massive budget deficit — potentially raising taxes and cutting spending — the very austerity measures helping to reduce a government budget crisis could ultimately plunge us into another recession.

What’s an investor to do in a portfolio?

The fiscal cliff is prompting consternation among financial planners, some of whom warn their retirement-age clients to avoid the stock market. “The U.S. is where Greece was four years ago,” opines Dan White, a financial planner in Glen Mills, founder of Dan White & Associates L.L.C. “Retirees can’t afford to lose money in the market. It’s great [to invest] when you’re working. But you can’t when you’re withdrawing” money from retirement accounts. He advises older clients to stick with index annuities.

Long-dated Treasuries have risen so much in price that many investors are either selling out of them slowly or shunning them. Yields on Treasuries (which move down when prices go higher, and vice versa) are pitiably low — and likely to stay that way. That amounts to a tax on savers who place money in U.S. government bonds. With yields at a historic low around 1.4 percent, Treasuries aren’t even keeping up with inflation.

“I don’t own them,” said David Pottruck, former chief executive of the Charles Schwab discount brokerage, on the sidelines of the 2012 Milken-Penn GSE Education Business Plan Competition at the University of Pennsylvania’s Annenberg Center last week. Pottruck, a Penn graduate, is now cochairman of HighTower Advisors, which oversees about $30 billion in assets.

“At a 2 percent to 2.5 percent inflation rate annually, that means essentially if you leave your money in cash for the next few years, you lose 2.5 percent of that every year. And that’s a tough principle for people to understand. They’re worth 2.5 percent less each year by doing nothing,” says Chris Millard of JPMorgan’s Philadelphia office.

Adding to the uncertainty, the Federal Reserve surprised the market last week when it failed to implement a new round of quantitative easing despite signs that the world is slipping into another recession. Although the Fed cut its U.S. economic growth forecast and said unemployment will remain above 8 percent, our central bank chose only to extend its so-called Operation Twist program.

Operation Twist means the Fed sells short-term while buying long-term bonds in an effort to “twist” the yield curve. Under the program, the Fed has been buying longer-dated Treasury bonds and selling Treasury bills and notes maturing up to three years, but its inventory of securities in that short-term band is down to about a two-month supply.

Investors wary of the impact of Jan. 1’s looming fiscal cliff, when the Bush-era tax cuts are due to end, could put a portion of their wealth into precious metals to hedge against the market’s volatility — either in exchange traded funds or gold mining shares, which have lagged the bullion price.

The United States could see consumer purchasing power fall substantially, notes investment bank Fairfax in a letter to clients. “We expect the Fed to take further action before this event to avert yet another potential crisis,” writes Fairfax. It advises investors to allocate money to gold as “we see the potential for further QE in the United States, China and Europe as leading gold higher this year.”

What else is working now in portfolios? Strangely enough, sectors benefiting from the historically low prices in U.S. natural gas, Millard says. He points to utilities switching over from coal to natural gas. They should benefit from lower fuel costs over the long term.

Speaking of natural gas, JPMorgan has stopped issuing new shares in its popular $4.27 billion Alerian MLP (symbol: AMJ), the master limited partnership exchange traded note. The fund reached 129 million shares last week, the maximum number allowed. By no longer issuing shares, the Alerian MLP essentially changes into a closed-end fund — and could trade at a premium or discount to its net asset value.

There are other options for natural gas exchange-traded funds, such as the ALPS Alerian MLP (symbol: AMLP), with $3.7 billion in assets. However, its structure as a C-corporation opens it up to corporate-level taxes, according to Investment News’ Jason Kephart. Master limited partnerships don’t pay corporate taxes.

Says Abbot Downing’s Thomas Raymond Jr., of the Alerian MLP: “It’s unfortunate as the menu of legitimate MLP investment vehicles is limited to begin with. As an owner, I wouldn’t mind a scarcity element creating a premium to [net asset value]. That said, AMJ could just as easily trade at a significant discount. It creates execution risk.”

Read more: http://www.philly.com/philly/business/homepage/20120626_Impending__lsquo_fiscal_cliff__has_financial_planners_reviewing_their_options.html#ixzz1yv9RJtZz


Trading on Supreme Court’s Obamacare Decision

People walk by the New York Stock Exchange on Monday. In the first trading day of April, U.S. stocks opened the second quarter with limited gains with the Dow Jones Industrial Average adding 37.95 points to 13,249 in morning trading,  But it closed the day up 52.45 points, to 13,264.49.   SPENCER PLATT / Getty Images
New York Stock Exchange on Monday.  SPENCER PLATT / Getty Images
The nation is watching our Supreme Court entertain arguments over the legality of the Obama health-care plan, which in 2014 will mandate that all Americans have health insurance or pay a penalty. So we wanted to highlight some health-care exchange-traded funds (ETFs) with stocks likely to be affected by this bill, the final Supreme Court decision, and even the presidential election.

If the Supreme Court allows Obama’s mandate to stand, these health-care companies and their corresponding ETFs, which mirror aspects of the industry, could keep rising in price. If the Republicans win the White House in November, Congress could overturn the Obama health care plan, in which case these stocks would likely tumble.

Many investors trade the health-care sector using the ETF known as XLV, the Healthcare Select Sector SPDR. The average daily trading volume of XLV is much heavier than some of the funds mentioned below, and that means the fund is easier to buy and sell.

But some ETFs have performed quite well. For example, since Obama’s health care plan passed, the iShares DJ US Healthcare Providers (symbol: IHF) ETF has gained 24 percent in value, and 11 percent year to date, compared with the S&P 500, which has gained 20 percent and 12 percent respectively in the same periods, according to WallachBeth Capital, a brokerage firm specializing in ETF trading.

IHF consists of 77 percent health-care services stocks and 17 percent pharmaceutical stocks, but it is a smallish fund, with only $235 million in assets under management and an expense ratio of 0.47 percent.

Other health-care ETFs include PowerShares Dynamic Healthcare Sector (symbol: PTH), which is weighted roughly 25 percent in pharmaceutical stocks, 25 percent health-care products, 24 percent health-care services and 14 percent biotech companies. Year to date, the PTH fund is up 12 percent, in line with the stock market, and up 28 percent since the passage of Obama’s health care plan. But it’s an even tinier fund, with just $40 million and a higher expense ratio of 0.65 percent.

Of the health-care ETFs we’ve mentioned, XLV is the most liquid, but it has lagged the other funds. XLV is up 7.9 percent year to date and 16 percent since Obama’s health care plan was approved, but is cheaper with an 0.18 percent expense ratio. XLV may be easier to trade and less expensive, but other ETFs may reward you more.

Gold ETFs

There was a time when gold became unfashionable, rejected by mainstream investors and policymakers. That was after the period of Paul Volcker, the famously hawkish Federal Reserve chairman who tamed inflation in the 1980s with high interest rates and led investors to begin trusting central banks again to restore the soundness of money.

No longer. Increasingly, investors are moving back into gold as signs of inflation pressures pick up. And China’s central bank has become a large buyer of gold, says the Economist’s Matthew Bishop, who cowrote the new book In Gold We Trust? The Future of Money in an Age of Uncertainty (Kindle Single). “Any asset where the Chinese are buyers is probably one you want to be in,” he said.

We outline the main ETFs investing in physical bullion: Gold SPDR (GLD) is a popular ETF investing in physical gold, meaning that it will reflect changes in spot prices of the commodity. iShares COMEX Gold Trust (IAU) also invests in physical gold and is cheaper than GLD in terms of expense ratio. ETFS Physical Swiss Gold Shares (SGOL) invests in physical gold bullion stored in Switzerland.

Leveraged gold ETFs are those that double your bet (either up or down) using borrowed funds, and they can be quite volatile. They include PowerShares DB Gold Double Long ETN (DGP).

A number of ETFs provide exposure to gold indirectly through investments in discovery, extraction, and sale of the metal, such as the Gold Miners ETF (GDX).

Read more at the Inquirer’s website: http://www.philly.com/philly/business/homepage/20120403_How_to_play_Obama_s_health_care_in_the_market.html#ixzz1r00xL3aJ