ALBERT HERTER

Archive for August, 2009|Monthly archive page

~~~VERY IMPORTANT READ~~~~ ‘ESTATE PLANNING CHECKLIST TO PROTECT YOUR ASSETS & HAVE YOUR WISHES HONORED,’ from Fidelity.com. PRINT IT UP! START TO CHECK THEM OFF AS YOU COMPLETE.

In Uncategorized on August 31, 2009 at 17:43

Have you been so focused on building assets that you haven’t given much thought to protecting them? Naming beneficiaries, creating a will, and other estate-planning tasks can help preserve what you’ve accumulated and distribute it to the people and causes most important to you.

Yes, it’s an uncomfortable topic, but think of it this way, do you want someone else making these decisions for you? Additionally, the federal estate tax landscape is rapidly changing, with the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 set to expire and Congress currently debating changes.

The most important tool: A will

A will is one of the most important legal documents you can create. It states who gets what after you’re gone and names someone to make things happen the way you say they should. If you don’t have a will, your assets will be dispersed according to state statutes—and who wants that?

“It’s a mistake to think of a will as something you need only if you have millions or are over sixty,” says Chris McDermott, CERTIFIED FINANCIAL PLANNERTM and Fidelity vice president of marketing product management. “A will isn’t just about money.”

Whether you have a will or not, your estate assets will generally be subject to a legal process known as probate. This process varies from state to state. When someone dies intestate (without a will), their assets can be tied up in the costly delay—and public display—of probate court. Without a clear estate plan, you may unintentionally trigger legal challenges among family members since it may be unclear how you really intended your assets to be passed on.

If you have minor children, it’s critical that your will designates a guardian for them, and name a trustee to protect your children’s inheritances. If you don’t specify who is best suited to look after your child if both you and your spouse die prematurely, the state will. Keep in mind that even with a will you’ll also want to be aware of your state’s inheritance laws.

Choose who’ll act on your behalf

In addition to a will, it is important to consider a power of attorney. These legal documents allow someone you designate to step in and act on your behalf if you are incapacitated. It can take effect immediately (durable) or at the time of your incapacity (springing). It typically authorizes someone to act on your behalf with respect to your financial affairs, and is often executed by one spouse for another. There are several considerations to keep in mind when setting up a power of attorney. Any competent adult can serve as your agent. It can be general or limited and apply only to particular assets or accounts that you own. Lastly, it can take effect immediately or at the time of your incapacitation.

A health care proxy (also called a “durable power of attorney for health care” in some states) authorizes someone to act on your behalf for your medical affairs. Unlike a durable power of attorney, before someone can act as your health care proxy, you must become incapacitated and unable to make informed decisions for yourself. You’ll want to be specific about what decisions your health care proxy agent can and can’t make on your behalf. You may also want to draft an advanced medical directive, also known as a living will. This expresses your wishes to your agent and doctors when considering the use of life-sustaining procedures.

Name beneficiaries on financial accounts

Designating a beneficiary for investment accounts can be as important as writing a will. These decisions are critical but not complex. Here’s how to name one for:

Retirement accounts such as IRAs, Roth IRAs, and SIMPLE IRAs. Assets in your retirement accounts pass directly to the beneficiaries you’ve designated with your account custodian, trustee, or plan administrator. Furthermore, your beneficiary designations can supersede any accommodation you have made in your will for your retirement account (see transfer-on death discussed below). Under IRS rules, required distributions from an inherited IRA are generally based on the age of the beneficiary, not the age of the original IRA owner. So if your beneficiary is younger than you, the new rules can minimize the taxable amount that must be withdrawn each year after your death.

Employer-sponsored retirement plans. If you are married, keep in mind that most employer-sponsored retirement plans automatically designate your spouse as the beneficiary unless you name another beneficiary(ies) and your spouse has consented in writing. Remember also that your beneficiary designations can supersede any accommodation you have made in your will for your retirement account.

Non-retirement accounts. Designating a beneficiary, or beneficiaries, on a non-retirement account, such as a brokerage account, may establish a “transfer-on-death” (TOD) registration for the account. For an individual account, a TOD registration allows ownership of the account to be transferred to a designated beneficiary upon your death. Perhaps most importantly, and in many instances, a TOD registration allows an account to pass outside probate, enabling your beneficiaries to avoid the time and expense of the probate process.

As with all accounts, estate taxes may still apply. Be sure to consult your tax advisor.

Keep everything up to date

“Even the best plan isn’t effective if it doesn’t keep pace with your life,” notes McDermott. He recommends setting aside a special time each year—around tax time, for example—to review not only your paperwork, but any life events that have occurred. Births and deaths obviously have a big impact.

Ask for help

It’s important to know the difference between what you can do on your own and when you need professional help in preparing for the unexpected. Do-it-yourself estate planning is risky, so it makes sense to ask an attorney to draw up legal documents such as your will, power of attorney, and health care proxy. An experienced professional can actually save you money and spare you headaches.

‘CAN VANISHED REAL ESTATE WEALTH RETURN?,’ from the Wall St. Journal, via fidelity.com

In Uncategorized on August 26, 2009 at 10:18

Everyone talks about house price averages. But how much actual wealth have American households lost in the real estate crash? (And what, if anything, does this mean for you and your money?)

The story on the indices is mixed. The Standard & Poor’s Case-Shiller 20 City Composite is down about a third from its peak three years ago. Inevitably this generates a lot of the buzz. But Case-Shiller is weighted towards big cities, including Los Angeles, Las Vegas and Miami, where declines have been severe. Other sources believe the average decline nationwide has been much more modest.

The Federal Reserve, using a variety of sources, has its own estimate of real estate values and publishes these quarterly.

From the end of 2006 through March 31, it says, the total market value of U.S. household real estate fell from $21.9 trillion to $17.9 trillion. That’s about 18%. (The lost wealth works out at just over $13,000 for every person in the country.)

But although house prices get all the attention, they are only half the story.

During the same period of time, total outstanding mortgage lending rose from $9.9 trillion to $10.5 trillion.

Homeowners’ equity collapsed. Even if we take the Fed’s conservative estimates for the decline in house prices, that equity has fallen about 40% from the peak.

The chart at left tells the story. It is based on Federal Reserve data, and shows the equity homeowners have left in their homes.

As of March 31, owners’ equity accounted for just 41.4% of real estate values. The levels are the lowest on record, and of course they are far below those which were standard a generation ago.

This is a major difference with the last real estate bust, in the early 1990s, and it’s why historical comparisons can be so dangerous. In the late 1990s, when the last slump was tapering off, home equity levels stayed in the high fifties.

To put this in context: Given current mortgage levels, even if a miracle happened, and home prices recovered all the way back up to their peak 2006 bubble levels the average equity rate would still only be 52%.

Zillow.com, the real estate data company, estimates 13.5 million single-family homes in America are now in negative equity — in other words, the property is worth less than the mortgage(s). That’s 23% of those homes with mortgages. Moody’s Economy.com puts the numbers even higher, at around 16 million.

And it’s not just the well-known disaster zones like Las Vegas, Florida and parts of California. Economy.com says 20% of Texan homes are underwater on their mortgage, and 21% of those in Indiana.

What does this mean?

Maybe home prices have stopped collapsing (although it would be a bold bet to say this for certain). But the picture on home equity is yet another reason to be skeptical that we will see a big, sustained bounce soon. Many potential sellers have a desperately weak hand. And many potential buyers lack enough equity in their current home to trade up.

It is also another reason to be cautious about prospects for an economic recovery. Homeowners can’t tap their equity to spend. Instead they are likely to be paying down their debts. There is now some debate about how powerful the housing “wealth effect” really is. But most economists agree that rising house prices helped drive at least some consumer spending. And the collapse in equity can hardly be positive.

Wall Street has turned more bullish recently on consumer discretionary stocks. Many have retraced their losses during the financial crisis. It will be interesting to see whether this has been too much, too soon.

‘FOUR SMART WAYS TO REDUCE YOUR TAX BILL,’ from Fortune Magazine via fidelity.com. Steps you can take TODAY to lower your tax liability. READ ON!!!!!!

In Uncategorized on August 25, 2009 at 19:50

We spoke to several leading financial advisers about the strategies they were recommending their clients adopt to cut their taxes now and in the future.

Harvest your stock market losses

“We have been aggressively harvesting tax losses for our clients over the last year or two, and of course the market environment has assisted us with that,” says Gregg Fisher, president of financial advisory firm Gerstein Fisher.

“Those losses can be used to offset capital gains in the future, and if you think capital gains rates might be higher in the future, those losses become even more valuable,” he says.

And for clients who still like the battered stock they just sold, no problem. IRS rules allow an investor to buy the asset back after 31 days.

Cash in some winners

There’s also a tax strategy for those with gains in their portfolio.

A number of advisers are urging their more affluent clients to sell some of those appreciated assets in order to lock in the gain, and to pay the capital gains tax while it’s only 15%, before it rises to 20% in 2011.

These investors can also buy back the same shares after 31 days if they still want to own the stock.

Invest in municipal bonds

Many advisers are also recommending that clients put a bigger chunk of their cash into tax-free municipal bonds.

Although many states are facing severe financial difficulties because of the recession, “We like munis right now because even during the Great Depression the default rate was less than 4%, and we’re not in a Great Depression,” says Mark Brown, a managing partner at Brown & Tedstrom, a financial planning and advisory firm.

“In a normal recession, less than one-tenth of 1% has been the historical default rate.” He adds that their prices have fallen over the past six months, making them even more attractive.

Divide and conquer

Even as tax rates rise, you’ll probably be paying less on capital gains than on ordinary income.

Sean Cunniff, a research director in TowerGroup’s brokerage and wealth management service, is recommending that investors take advantage of that gap by favoring fixed-income investments (which pay interest that is taxed as ordinary income) in your tax-deferred accounts and putting equity investments with big potential long-term capital gains into taxable accounts.

‘BUYING BONDS OR BUYING BOND FUNDS,’ from Fidelity.com. I prefer bond funds of course!

In Uncategorized on August 24, 2009 at 20:10

You’ve decided your portfolio needs bonds. Now you have to decide: Will you invest in mutual bond funds or individual bonds?

There’s no right or wrong. “We find people who own one or the other, and people who own both,” said Richard Carter, vice president of fixed income inventory at Fidelity Investments.

It depends on how much money you have to invest, your risk appetite and whether you have a goal, such as buying a house or funding college tuition. Then there’s the time you want to spend researching and monitoring your holdings.

Bonds and bond funds are vastly different:

Individual bonds pay a fixed stream of income, generally semi-annually. They return your principal on a specific date if held to maturity.

Bond funds invest in many securities with different interest, or coupon, payments. The income received from the bonds is distributed monthly to shareholders. The distribution may vary month to month. The fund’s value also varies daily.

Why fixed-income securities? Bonds can generate steady income in a diversified portfolio.  They tend to move in the opposite direction of stocks – but not always.

“Bonds are an important way to buffer a stock portfolio and at the same time provide you with compounded interest,” said James Swanson, chief investment strategist at MFS Investment Management in Boston.

Safer, lower-yielding bonds include: Treasurys, investment-grade corporate bonds, municipal bonds and bonds issued by government-sponsored agencies such as Fannie Mae . Riskier, higher-yielding bets include corporate bonds rated below investment-grade, also known as “junk bonds.”

Here are some of the pros and cons of bond funds and individual bonds.

Why bond funds

Diversification: Funds offer diversification with less money. With a few thousand bucks, you can buy shares in, say, a corporate bond fund. They often hold bonds from hundreds of companies, so you’re shielded if a few companies default. By contrast, your returns suffer if you own a limited number of bonds from a handful of companies and an issuer defaults.

Plus, it’s not cheap to build a diverse portfolio. “It would be difficult to efficiently create a diverse portfolio of corporate bonds with much less than $100,000,” said Clint Edgington, president of Beacon Hill Investment Advisory, a fee-only investment advisory firm in Columbus, Ohio.

Price: A fund lets you buy a bond portfolio at the bid, or buyer’s price – versus the higher selling, or ask, price in the market. By contrast, investors buying individual bonds often pay the higher price.

“When an investor buys a $1,000 face value individual bond they’ll always pay the ask price, which for even more widely traded corporate bonds can be $20 higher than the bid price,” said Todd Burchett, manager of ICON Bond Fund at ICON Advisers, a mutual fund company in Greenwood Village, Colo. The bid-ask spread for more thinly traded corporate junk bonds can be as much as $200.

Research: Bond funds rely on credit research departments to analyze an issuer’s credit risk. “It’s probably difficult for most retail investors to have the background or the knowledge to buy individual bond holdings,” said Lowell Bennett, fixed-income strategist at Mellon Capital, which manages several Dreyfus Corp. funds.

Liquidity: You can sell fund shares any time at the fund’s current value. Selling an individual bond often is tougher, if you must sell before maturity. They trade less frequently than stocks. And bonds typically trade “over the counter,” meaning a broker hooks up buyers and sellers who negotiate price. Riskier bonds can be costlier to unload.

Why individual bonds

Predictability: You know the date your bond matures, and the interest payment is fixed. A bond’s price will fall if market interest rates rise, but you’ll be paid the bond’s face value if you hold it until maturity – assuming the issuer doesn’t default. “You don’t have that security blanket with funds,” Beacon Hill’s Edgington said.

Income: Individual bonds allow you to generate a specific income stream. That’s important if you’re looking to fund, say, a new home or retirement. You can create a “ladder” of individual bonds with different maturities and income payment schedules to meet your income needs and investment time frame.

“A ladder plays on the notion that bonds have the ability to be modeled to create a specific cash flow,” said Fidelity’s Carter.

Cost: With some effort, you can slash costs in certain cases by buying bonds directly from an issuer, without a mark-up or commission.

The U.S. Treasury’s TreasuryDirect program allows you to buy securities directly from Uncle Sam. Municipal bond issuers such as states and cities offer “retail order periods” allowing you to spend $5,000 to buy munis directly. Similarly, Fidelity’s CorporateNotes program allows you to buy bonds directly from certain companies. Bond funds charge management fees. Some levy a charge when you buy or sell.

Control: You know exactly what you own when you buy individual bonds – the maturity date and interest rate. You choose what to buy. “There’s a bit of a sense of control when you own your own positions,” said Wes Moss, chief investment strategist at Capital Investment Advisors, a fee-only advisory firm in Atlanta.

Experts said wealthier individuals are good candidates for individual bonds. They’ve got cash to build diverse portfolios, although it doesn’t take as much money or effort to craft a portfolio if you’re focusing solely on safer and more widely traded securities such as Treasuries.

Individual bonds or bond funds can be a good bet. But which way is right for you depends on your own needs, your financial situation, your tolerance for risk, the time you have and the amount of research you want to do.

Given the complexities, bond funds probably are the right choice for many investors. Many, but not all.

‘ROUBINI WARNS OF DOUBLE DIP RECESSION,’ from Reuters via fidelity.com.

In Uncategorized on August 24, 2009 at 10:10

Nouriel Roubini, one of the few economists who accurately predicted the magnitude of the world’s recent financial troubles, sees a “big risk” of a double-dip recession, according to an opinion piece posted on the Financial Times’ website on Sunday.

Roubini, a professor at New York University’sStern School of Business, said it appears the global economy will bottom out in the second half of this year, and that U.S. and western European economies will likely experience “anemic” and “below trend” growth for at least a couple of years.

Yet he warned that policymakers face a “damned if they do and damned if they don’t” conundrum in trying to unwind their massive fiscal and monetary stimuli to keep the global economy from toppling into a depression.

He said that if policymakers try to fight rising budget deficits by raising taxes and cutting spending, they could undermine any recovery.

On the other hand, he said if they maintain large deficits, worries about excessive inflation will grow, causing bond yields and borrowing rates to rise and perhaps choking off economic growth.

Roubini said another reason to worry is that energy, food and oil prices are rising faster than fundamentals warrant, and could be driven higher by speculation or if excessive liquidity creates artificially high demand.

He said the global economy “could not withstand another contractionary shock” if speculation drives oil rapidly toward $100 per barrel. U.S. crude oil futures traded Friday at about $73.83.

Roubini said the anemic growth he expects would follow a couple of quarters of rapid growth, as inventories and production levels recover from near-depression levels.

‘STOCKS: FIVE KEY SIGNS FOR INVESTORS TO WATCH,’ from Businessweek via fidelity.com . SHORT & IMPORTANT READ.

In Uncategorized on August 23, 2009 at 17:42

Could the big pullback in global equities on Aug. 17 mark a turning point for the stock market? After a 50% advance in the S&P 500 (.SPX) since March, some argue stock investors had gotten too enthusiastic.

Others, however, insist the sell-off was not the end of the bull, but a sign the market was taking a healthy rest and consolidating its recent gains. The S&P 500 fell a total of 3.25% on Aug. 14 and 17, to 979.73.

Whether a new period of volatility is at hand — or stocks resume a steady upward march — remains to be seen; predicting the market’s direction is notoriously difficult. Still, there are some things investors should be looking at in the coming weeks to help get a better sense of where things are headed. BusinessWeek asked investing experts what they’re watching.

1. China

The resilience of the Chinese economy has helped bolster world markets for several months, as stimulus from China’s strong central government bore fruit. Ordered by Beijing to do so, China’s banks boosted lending and Chinese businesses stockpiled commodities.

In 2009 through Aug. 4, China’s leading stock index, the Shanghai Composite (.SSEC), had advanced a whopping 91%. But since then, the index has slid 17%. On Aug. 17 the index dropped 5.8% to close at 2,879.63.

“The Shanghai Composite has been posting some eye-opening declines,” says independent market strategist Doug Peta. “Maybe that’s making investors skittish, given that China’s stimulus program seemed to be the most successful worldwide.”

2. Investors’ moods

It’s a paradox, but an optimistic investment community is often a bad sign for the stock market. If all or most investors expect further gains, it suggests the stock market could be running out of new buyers.

Bruce Bittles, chief investment strategist at Robert W. Baird, warned in an Aug. 17 note that “indicators of investor sentiment edged closer to extreme optimism last week.” Data from Investors Intelligence showed the number of outright bears falling from 26% to 21%, the fewest since the market’s peak of October 2007. Another survey, by the American Association of Individual Investors showed bullish investors rising from 50% to 51%.

Not everyone is convinced. Robert Bacarella, portfolio manager at the Monetta Mutual Funds, detects in investors some greater willingness to take a chance on equities. However, most investors haven’t forgotten their huge losses in late 2008 and early 2009, Bacarella says. “They are frightened to death to come back into the market.”

Improving economic conditions and earnings reports do raise investor expectations. “As things get better, that only raises the bar,” Peta says. Many investors still have a lot of cash to invest, but conditions will need to keep improving to continue pushing stocks higher, he says.

3. Earnings

By now more than 90% of the S&P 500 index has reported earnings from the second quarter of 2009. For the most part, results have been better than expected. According to Thomson Reuters (TRI), analysts on Apr. 1 were expecting S&P 500 second-quarter earnings to fall 31.1% from the year before — as of Aug. 17 earnings were down 28%.

As in the aftermath of the first quarter, second-quarter earnings coincided with a stock market rally. Will the third quarter do the same?

For many firms, the third quarter is already half over. But the bulk of results won’t start rolling in until Oct. 7, when Alcoa (AA) is expected to kick off earnings season.

In the meantime, investors and analysts are making their bets. Analysts expect third-quarter earnings to fall 20.7%, a number that has barely budged in the last six weeks. Since July 1, however, expectations have jumped for the fourth quarter, with expected growth rising to 291% from 183%. The main driver is the financial sector, which is expected to recover from huge losses in the fourth quarter of 2008.

4. Commodities and oil

For investors watching the state of the global economy, an excellent gauge can be commodities markets. A growing economy needs more oil, copper, and other resources. A shrinking economy needs much less.

“It’s a reflection of how people are feeling about the economy in the near term,” says John Wilson, chief technical strategist at Morgan Keegan.

After a sharp drop in late 2008, many commodities markets have rallied this year, reflecting optimism about the economy and demand from China.

On Aug. 17 the Centre for Global Energy Studies estimated China’s oil imports rose 53% from January to July.

No doubt that is one reason the price of a barrel of West Texas Intermediate crude oil jumped almost 28% from the start of 2009 to Aug. 6. Since then, however, the price of oil has fallen 7.25%. That includes a 5 percentage point decline in two trading sessions, to a close of $66.75 on Aug. 17.

Those recent declines have Wilson saying “the path of least resistance [for oil] is down, until proven otherwise.”

William Rutherford, president of Rutherford Investment Management, suspects falling oil prices reflect an abundance of supply. “We’ve still got a soft global economy,” he says.

5. The strength of the recovery

For many investors, the key factor is how quickly and consistently the U.S. and global economy can recover from recession.

“The duration and durability of the recovery is on the mind of investors,” says Peter Cardillo, chief market economist at Avalon Partners.

A warning came Aug. 14 from the Reuters University of Michigan Survey of Consumers, which showed its consumer sentiment index slipping from 70.8 in June to 66.0 in July. A majority of respondents said their financial situation was worsening, and only 14% expected employment conditions to improve in the next year.

With consumer spending 70% of the U.S. economy, that’s a problem, Rutherford says. “It’s going to be a slow, gradual recovery.”

“We need to see more proof that consumer spending is picking up,” Bacarella says.

Still, Cardillo expects that on Aug. 20 the July index of leading economic indicators will show the U.S. is “already out of recession.”

In recent months, about two out of every three economic signals has shown improvement, Peta says. “Everything’s much better than anyone would have expected in April or May,” he says.

But a stock market — particularly one that’s experienced a 45% bounce in recent months — can’t rely on past economic improvements to drive future gains. Whether in the form of global economic activity, a strong U.S. rebound, earnings surprises or rising commodity demand, stocks — in order to keep moving higher — will need plenty of fresh fuel. The news flow over the next several weeks will determine whether the Aug. 17 sell-off was just a speed bump on the market’s road to recovery — or a harbinger of less pleasant things to come.

WHAT YOU SHOULD HAVE BEEN READING THREE MONTHS AGO & ACTING ON. Posted MAY 29TH, 2009, AT fidelity.com.

In Uncategorized on August 22, 2009 at 10:48

‘STOCKS ON THE REBOUND? WHAT TO LOOK FOR IN THE LEADING ECONOMIC INDICATORS.’ Posted May 29th, 2009, at fidelity.com:

Understanding leading indicators

There is no shortage of economic releases on regular news outlets each day, but not all economic data is of equal value in discerning the future trajectory of the economy. The most useful economic indicators for identifying turning points in an economic cycle are considered “leading” indicators because they tend to identify emerging trends. For instance, housing permits are a leading indicator of housing activity because builders must register for permits prior to beginning construction.

Other categories of indicators are generally less useful to investors because they tend to describe what is happening currently (coincident), or detail what has already transpired (lagging). In addition, many leading economic indicators tend to be reported in a more timely manner, while reporting lags make other indicator data much less useful for forecasting the direction of the economy.

The record in predicting recoveries

Large swings in the direction of leading indicators historically have been helpful in identifying turns in economic cycles, from expansion to recession and recession to recovery. A well-recognized group of leading indicators are the 10 sub-components of the Conference Board’s Leading Economic Index (LEI), which include data from a wide variety of sectors in the economy, such as consumer expectations, manufacturing and the financial markets.1

While these 10 individual indicators do not necessarily measure the magnitude of an upcoming rebound or downturn, when they all move in a sustained manner in one direction they often portend the general trajectory of the economy. For instance, for every recession since 1958, the percentage of leading indicators within the LEI that rose during the previous six-month period declined to 20% or lower (two or fewer out of 10 indicators rising). In contrast, at least 90% of the indicators rose in anticipation or concurrently with each subsequent economic recovery (see Exhibit 1).

Thus, after reaching recessionary levels, sustained multi-month upward movement in leading economic indicators has historically presaged or accompanied an economic rebound. Because stock markets tend to anticipate recoveries, early signs of upward movements in leading indicators often have accompanied stock market rallies, with most gains typically occurring before all leading indicators had moved directionally upward.

Current update on leading indicators—positive (though currently less useful) indicators

While most leading indicators turned dramatically negative in late 2008, two monetary indicators have been in positive territory for quite some time—the money supply and yield curve. Both of these indicators are evidence of significant U.S. government policy responses trying to combat deleveraging in the financial system, to repair the poor state of banks’ balance sheets, and to stave off the threat of deflation. However, due to the extraordinary nature of the financial crisis, during the past year these indicators have failed to predict an economic upturn.

The Federal Reserve began to lower its target short-term interest rate in the fall of 2007, followed by a series of cuts that left the target rate near 0% in mid December 2008.2 This action steepened the yield curve (short-term interest rates lower than long-term rates). Typically, a steep yield curve allows banks to become more profitable and spark a recovery in lending (banks borrow funds at short-term rates and lend them to businesses and consumers at higher long-term rates). In addition, the Fed launched a number of initiatives and quantitative easing programs that have increased the money supply.

Increases in money supply have historically provided a boost to financial activity with knock-on effects for the economy. In this economic cycle, however, these positive factors have been overwhelmed by the credit crisis, caused by the extraordinary damage done to the balance sheets of financial firms as a result of massive losses on mortgage-related and other securities. So while a steep yield curve and rising money supply have helped stabilize the financial system from its crisis level several months ago, they have yet to spur a broad-based economic recovery.

The current circumstances—the aftermath of the worst financial crisis since the Great Depression—are a reminder that leading indicators, like all economic data, are not foolproof. No two recessions are exactly alike, and thus no single indicator will ever be able to accurately forecast every possible economic scenario. For this reason, it is important for investors to watch for several indicators moving in the same direction (see Exhibit 2 for an update on leading indicators).

Recently positive (though volatile) indicators

The U.S. stock market is thought of as a leading indicator because it reflects business and investor confidence, in addition to other market factors. The stock market rallied more than 30% during the two months after it set a new cyclical low on March 9, 2009, a sharp turnaround from the bear market that began toward the end of 2007.3 Part of the impetus for the rally was investor reaction to better-than-expected economic reports in March and April.

However, stock price fluctuations can occur for a myriad of other reasons that are unrelated to economic conditions (including geopolitical events, disease, catastrophic weather events, terrorism, etc.). This is a reminder of a common pitfall of the stock market and other leading indicators—their volatility. Week-to-week or month-to-month fluctuations in data may be caused by statistical noise or unrelated factors, which is why it is important to focus on underlying trends.

Improving (though still not out of the woods) indicators

The most significant trend so far in the spring of 2009 is that the pace of decline has moderated for a handful of leading indicators that were severely negative in late 2008 and early 2009. In some cases, these indicators point to stabilization, in other cases they simply show that the rapid deterioration in the economy has moderated. Taken together, however, they have provided hope that the worst part of the economic recession may be in the past, and that the economy may stabilize earlier than expected.

An example of a leading indicator that has improved is initial unemployment claims (see previously released MARE article, Understanding Economic Indicators: Unemployment, for more detail on initial unemployment claims). Though the nation’s overall (aggregate) unemployment rate tends to garner more news headlines, the number of people filing for initial unemployment insurance claims is a good proxy for layoffs, and new claims tend to be a leading economic indicator for the direction of the labor markets (as well as the unemployment rate itself, which is a lagging indicator).

Historically, a slowing pace of layoffs has generally preceded a bottoming in the overall economy. During the past month or so, while high unemployment claims demonstrated that workers continue to lose jobs, the number of initial jobless claims has trended down.

Other leading indicators have followed a similar pattern, indicating economic weakness but showing a moderating pace of decline from late 2008 and early 2009. For example, while the absolute rate of newly issued housing permits hit an all-time monthly low level in March 2009, the rate of decline in building permits has slowed considerably in recent months. This slower rate of decline is potentially a sign of stabilization in home building conditions and housing markets.

Similarly, in March 2009 manufacturer’s new orders for non-defense capital goods—a proxy for overall business investment activity—nudged up for the second month in a row after hitting its lowest level since 1993 earlier in January. Consumer expectations, a leading indicator of consumer activity, rebounded sharply in April compared to the past several months (though it remained at a low level on a historical basis). Although all of these indicators still point toward continued economic weakness, their relative improvement from previous months provided support for the notion that the worst of the economic downturn may be over.

Investment implications

The early stages of an economic recovery are usually marked by violent fits and starts. A close examination of leading economic indicators shows that while some remain negative, others have either improved or their rate of deterioration has slowed. While these incipient signs of stabilization helped fuel the recent stock market rally, investors will be looking for sustained improvement in these indicators to confirm a bottoming of the economy.

Of course, there are no guarantees regarding the timing or the magnitude of any potential economic recovery, but historical analysis of leading indicators shows that owning stocks in the early stage of an economic upturn often has led to favorable results. What’s more, investors should be wary of waiting for all indicators to turn positive because this “all systems go” signal has usually occurred at or beyond the end of recessions, and after a considerable percentage of a bull market’s gains have been recorded (see related MARE article, U.S. Stocks Often Have Rebounded During Recessions).

‘WHY “GENERATION Y” NEEDS TO SAVE, ‘ from Marketwatch via fidelity.com.

In Uncategorized on August 15, 2009 at 13:24

A lack of knowledge about finances could make planning for retirement much harder work for young adults.

Almost half — 47% — of Americans born between 1977 and 1994, also known as Generation Y, are below average when it comes to financial literacy, with little understanding of how to budget and save efficiently, according to a survey by the National Foundation for Credit Counseling.

The survey, which polled 1,000 adults in March, also found that 45% of Generation Y adults have no savings.

Retirement savings are of particular concern for younger Americans because under current actuarial assumptions the Social Security trust fund will be exhausted in 2039, the year the first of Gen Y will turn 62, and benefits could be threatened unless changes are made.

Social Security Administration officials and financial planners continue to emphasize the importance of individual savings, retirement plans — 401(k) accounts and individual retirement accounts — and Social Security benefits for post-work income, what the SSA calls a “three legged stool.”

Both advise not relying solely on Social Security for retirement income.

George Barnes, an investment adviser at Prudential Financial Planning Services in Newark, N.J., applied the slogan from discount clothier, Syms: “An educated consumer is our best customer when it comes to investing.”

The key things to learn: save, even if you can only save small amounts, and make wise investments.

“Time is money’s best friend, so starting to save or invest early can yield tremendous results, even if it’s small amounts, as over time they add up,” Gail Cunningham, public relations vice president at the NFCC, said. “When you’re young and just starting out, you have so many needs and wants that finding that extra money is particularly hard, especially since retirement seems so far off.”

Fresh-from-college adults widely use regular savings accounts, money market accounts and certificates of deposit at commercial banks — all ways of saving but with lower yields than investing in bonds or the riskier stock market. Those working for employers who provide 401(k) retirement plans can learn much from the plan materials, Barnes said.

When trying to save money for reserves or emergency funds, “there’s nothing like the bank,” Barnes said.

The Federal Deposit Insurance Corporation insures savings accounts and CDs, up to $250,000 in most cases, and there is more liquidity with those vehicles. Savings accounts are more liquid than bonds or stocks, meaning an investor can sell quickly in an emergency and get all of his or her money back.

Barnes suggests that the out-of-college jobless interested in saving for retirement explore IRAs, retirement accounts for individuals that can invest in securities like common stock or mutual funds.

Less risky IRAs have stated interest rates and are similar to long-term CDs while high-risk IRAs invest your money in market securities like mutual funds. If an IRA account holder withdraws money early, the withdrawal could be subject to taxes and penalties. A big benefit, though, are the tax savings. ING Direct , Fidelity, The Vanguard Group and T. Rowe Price  all offer IRA accounts.

Look beyond immediate gratification

According to Barnes, who has 17- and 18-year-old children, a generation used to quick access lacks patience and education on the volatility of the investment markets. As cliché as it may sound, he said, “Education is really the key to success.”

“There’s a mindset that is possibly generation-wide that is ‘instant gratification,'” Barnes said. “You Twitter just so you can find what someone is doing today. You microwave, [you] have Easy Pass.”

“As a result, when you don’t see a result immediately, or you don’t see value immediately, you question the source,” he said.

Along with education and the need for discipline, or the ability to stay on a budget and balance a checkbook, Barnes says there is an issue with trust among younger adults; if there’s a risk attached, young adults are deterred from buying in.

“Authority is questioned more often now,” he said. “That kind of mentality carries over in your investments. What is missing that was very prevalent for that older generation is trust.”

“It always helps to see the prize awaiting you at the finish line,” Cunningham said. So, young adults should consider the following: Assuming a 25% tax bracket, invest just $40 per week for the next 50 years until retirement. An annual return on 8% will build into a nest egg of $1,000,000 after taxes.

Where are you going to find that extra $40?

“There are only three answers,” she said. “Increase your income, decrease your expenses or both. If it’s worth it to you, you’ll find a way.”

‘FOUR FUNDS WITH A FINANCIAL FUTURE,’ from Fidelity.com.

In Uncategorized on August 13, 2009 at 23:12

Financial-services stocks have bounced back dramatically from the market’s nadir of early March. During the past month alone, the S&P Financial sector popped 21%, making it the best-performing sector within the S&P 500 Index  for the period.

If you were off enjoying your summer vacation and missed this rally, you may be wondering: Is it too late to dive back in?

The short answer: Take the longer view. The stocks have been recovering because investors are betting that the strong have survived. “From a bigger picture point of view, I think the next three to five years will be a period of great opportunity to make noticeable returns in financial services stocks,” says David Ellison, manager of FBR Small Cap Financial Fund .

After the demise of Lehman Brothers and the near-meltdown of the global financial system last fall, it appears government intervention has successfully staved off the death of capitalism as we know it. However, with unemployment still high, foreclosures climbing, and troubled commercial real estate loans looming, there are still significant challenges for banks and other financial-services companies. Nearly all of the major players in the financial sector are digging out from the downturn, which hit banking, mortgage finance, consumer finance, investment banking and brokerage, asset management and custody, corporate lending, insurance and real estate.

More recently, however, the sector has been helped by good news. In May, the government released the results of its stress tests of the nation’s 19 largest banks. The results were generally viewed as positive, although 10 banks were instructed to raise additional capital, which they accomplished easily by selling new stock. In fact, May was the biggest month ever for secondary equity issuance. In recent weeks, quarterly earnings for some of the nation’s largest banks, such as Goldman Sachs , Bank of America , and JP Morgan  exceeded expectations.

“We changed the debate on large financial-services companies from a debate about survival to a debate about earnings power. That’s a very healthy development for the sector,” says Benjamin Hesse, manager of Fidelity Select Financial Services Portfolio .

The tide turns

As the recent upturn demonstrates, there is a growing sense that perhaps the worst is over for financial-services companies. For the three-month period ended Aug. 6, financials were the market’s second best-performing sector, rising 11.85%. Year-to date, the sector’s 14.61% gain exceeds the 11.95% gain in the S&P 500 Index.

But the recovery has been uneven. A closer look at the wide variety of industries within the sector reveals dramatically varying performance. For example, while insurance broker stocks fell 7.5% year-to-date through August 7, investment banking and brokerage firms soared 77.8%.

These divergent results underscore the importance of being selective when looking at the financial-services sector. While you may be tempted to take a flyer on beaten-down stocks like AIG  or Citigroup , investing in a diversified sector fund could be a more prudent way to participate in any recovery, since the diversification will reduce downside risk.

One such diversified fund is Hesse’s Fidelity Select Services Portfolio , which holds large-cap stocks from both the United States and overseas. Hesse says consolidation within the industry, declining delinquencies on consumer credit cards, and higher capital reserves are all positive trends.

In recent months, he has favored bank holding companies with high exposure to the investment banking industry. He thinks these companies will profit from an uptick in bond issuance and wider bid and ask spreads in their trading operations. Beaten-down insurance companies have earned a more prominent spot in the fund as well.

Hesse also has increased the fund’s exposure to foreign banks in China — where he believes banks can expand their return on equity — and Japan, where valuations have been extremely low.

While Hesse is heartened by the recent recovery in financial stocks, he is mindful of the risks that still loom on the horizon, including tougher regulations on the industry. That is a mixed blessing for the banks, since it could limit competition but also add new costs.

“Over the long-term, government regulation may be a barrier to entry, so maybe you see a little bit of pricing power coming back over time,” Hesse says. “But in the near term it probably means lower returns.”

New consumer protections for mortgage loans, home equity loans and credit cards under consideration in Washington could put a dent in the future earnings potential of large financial services companies, he says. “I think that what happens with the regulatory framework is one of the biggest overhangs for the sector,” Hesse says.

In the small-cap sector, FBR Small Cap Financial Fund  invests in banks, thrifts and other financial-services companies with market capitalizations of $3 billion or less. Manager Ellison, who has been at the fund’s helm since its inception in 1997, looks for companies with strong management teams and that are big enough in their markets to have some pricing power.

“This is a great time to be in this space, because I think it’s all about management now,” Ellison says. “Three to four years ago, we were dealing with a whole bunch of what I call  ‘Enrons.’ These were companies with very complicated balance sheets and income statements. Now we’re going back to de-levered, de-risked, de-complicated balance sheets, which will eventually show up in much more stable earnings.”

Ellison’s 26 years of experience analyzing and managing financial-sector funds has taught him valuable lessons about managing during a crisis. Having survived the savings and loan crisis of the late 1980s, he is much quicker to sell holdings and raise cash when danger is on the horizon. After having more than 60% of the fund’s assets in cash early in 2009, Ellison has since reduced cash to about 8%. While his fund did not escape unscathed, the move to raise cash helped reduce damage from the market meltdown.

Ellison thinks today’s low interest rate environment will help bank certificates of deposit compete with brokerage firm’s money market funds, many of which are yielding less than 1%. A steepening yield curve (meaning longer-term bonds have significantly higher yields than short-term bonds) also helps banks borrow money cheaply and lend it out at higher rates. “The loans banks are making today are vastly superior to the loans they were making two years ago,” Ellison says.

Despite recent gains, the financial services sector is not completely out of the woods. “There are still significant challenges ahead of us in terms of the economy, home prices, unemployment, commercial real estate prices, and tighter underwriting standards,” Ellison says. “This recovery is not a two-month thing. I look at it as a three- to five-year event and maybe even a seven-year event.”

Fund picks from Fidelity

Strategic Advisers Inc., a Fidelity Investments company, has sifted through the thousands of funds available through the Fidelity FundsNetwork, including Fidelity and non-Fidelity funds, to identify funds in a variety of investment categories, including financial services stocks. Analysts evaluate several criteria, including:

Performance: At least three years of performance data is required

Risk: Only funds with the highest three-year risk-adjusted returns (the so-called Sharpe Ratio) within each category are selected

Loads and fees: Funds that charge a transaction fee or sales load are not considered

Funds must have a minimum of $100 million in assets, be open to new investors, and have an investment minimum of no more than $2,500

‘EIGHT WAYS TO SAVE ON BABY CARE, ‘ from Smart Money at fidelity.com.

In Uncategorized on August 13, 2009 at 22:25

Babies have no sympathy for a challenging economic environment.

Even as inflation remains largely static because of the recession, the cost of raising a child is growing rapidly.

Parents can expect to spend an average $291,570 (accounting for inflation) over the first 17 years in the life of a child born this year, according to the latest figures from the Department of Agriculture, released in early August. (In comparison, parents of a child born in 2000, could expect to pay a little more than $165,000.)

Annual expenses increase as your child ages, but parents of a newborn can still expect to shell out roughly $12,000 during the first year. That covers the baby’s share of housing, utilities and transportation, as well as child-specific costs like clothing, food and babysitters.

“Having a baby has really opened my eyes to how we normally shop,” says Sok Verdery, a new dad and the chief executive of deal site CouponShack.com. “Luckily, there are tons of baby-related deals.”

Use these eight tactics to cut the costs of raising your baby without cutting corners:

Ignore registry advice

“Store registries are really the baby product industry marketing itself,” says Dr. Shelly Flais, a Chicago pediatrician and mother of four. “Babies only need a few things.” Once you have a crib, car seat, diapers and either breast milk or formula, everything else is more about making your parenting experience easier. Flais advises talking to other mothers about the items they found most and least helpful.

Try secondhand goods

Don’t pass up hand-me-downs from family and friends with older kids, or secondhand baby paraphernalia from yard sales and thrift stores. Kids grow so quickly that odds are good the items were barely used, which makes them a valuable deal for cost-conscious parents. For example, a 12-piece set of baby girl clothes sold for $3.99 on eBay (EBAY

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). Give items a thorough cleaning first, and check the Consumer Product Safety Commission site to make sure none were included in a safety recall.

One notable exception to the used rule: car seats, which the American Academy of Pediatrics advises always purchasing new. It’s not always easy to tell if the seat has been compromised, either from an accident or years of use.

Skimp on toys

Save the spoiling of your kids until they’re old enough to appreciate (and truly benefit from) an array of toys, says Reyne Rice, a trend analyst for the Toy Industry Association, a trade group that says it’s helped develop federal toy safety standards. “At an early age, the parent or caregiver is the baby’s favorite plaything,” she says. With that in mind, look for a few simple toys with bright colors and interesting sounds that will stimulate baby and let you play, too. Rice’s picks for infants age six months and younger: soft blocks, stacking rings and sturdy board or cloth books.

Breast-feed

Health and nutritional issues aside, breast feeding is the clear winner against formula in affordability. “Over the long haul, it can really save a lot of money,” says Flais — roughly $2,000 a year, according to Consumer Reports’ most recent annual study on infant formula.

Spread the word

Strategically alert a few groups that you’re expecting a baby, and you’ll never have to pay full price for diapers, baby food or formula. Plenty of companies are itching to send you coupons, says Renee Rosiak of Connecticut, a mother of four-month-old twins. Here’s where to spread the word:

* Manufacturers: Brands including Similac, Beech Nut and Pampers offer welcome kits including free samples, as well as regular newsletters full of coupons.

* Retailers: Target (TGT

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) and Babies R Us send out extra coupon booklets to parents who create a registry with them, while The Children’s Place offers coupons each year on your child’s birthday.

* Supermarkets: Most have baby clubs with coupons and extra rebates. For example, Shop Rite offers $10 back for every $100 in baby items purchased.

* Social networking sites: Rosiak has found freebies through Freecycle and Twitter. With so many coupons available from other sources, moms at networking sites like Moms of Multiples and MomsLikeMe.com often give away coupons for brands they don’t use or for products their kids have outgrown.

Pick double-duty items

Look for items that will continue to be useful as your baby grows. For example, forego a changing table that you’ll use for just two years in favor of a regular dresser and a separate changing pad that can be strapped to its top. Or purchase a travel system stroller that includes a strap-in car seat and adjusts to accommodate kids as old as four.

Make your own baby food

Thanks to a range of baby cookbooks on the market, making your own baby food is extremely cost-effective, Flais says. One 2.5-ounce jar of Beech-Nut Chiquita bananas costs 45 cents at Shop Rite, but a pound (16 ounces) of the ripe, fresh fruit costs 79 cents. She suggests working in big batches and freezing individual portions in ice-cube trays to reheat later.

Buy bulk staples online

The lowest unit price on big staples, like diapers and formula, often can be found online, says Verdery. Diapers.com accepts manufacturer’s coupons and offers its own sales and coupon codes. (Another tip: Check out the warehouse club, where prices can be as much as 50% cheaper than they are at the supermarket.)