Perspectives from Above the Noise – Week of December 23, 2013

3 Stories in the global economy that should not go un-noticed

Happy Holidays!

Stocks broke their losing streak and rallied on the long-awaited Fed taper and positive economic news. The Fed announced a modest taper of $10 billion, reducing the size of its monthly bond purchases to $75 billion. In order to make the tapering pill easier to swallow, the Fed pledged to keep rates near their current levels until the headline unemployment rate declines below 6.5%.

In Washington, the Senate approved the bipartisan budget deal, avoiding any last-minute brinksmanship. The bill guides government spending into 2015 and will avoid another government shutdown and will eliminate some sequestration cuts.

For the week, the S&P 500 gained 2.42%, the Dow surged 2.96%, and MSCI EAFE (developed international) added 2.58%.

Here are the 3 stories this week that rose above the noise:

Buyback Binge Is Back


Last quarter, U.S. companies bought back stock and paid dividends totaling $207 billion, the highest amount since the fourth quarter of 2007. Companies that represent this group have been rewarded as the S&P 500 Buyback Index, which measures the 100 stocks with the highest buyback ratios, has surged 45% this year, compared with a 28% rally for the S&P 500. The question now is whether companies are purchasing their stock at the wrong time, similar to what occurred in 2007 prior to the financial crisis. The concern is whether the market is due for long anticipated pullback.

Consumer Sentiment Up in December on Improved Economic Outlook 


U.S. consumer confidence rose to its highest level since July as the Thomson Reuters/University of Michigan Index of consumer sentiment increased to 82.5 in December, ahead of 75.1 in November. The results were encouraging and signal an improved outlook for consumer spending heading into 2014. The survey showed consumer sentiment improved from a more optimistic outlook on economic growth, improving job prospects, and rising household wealth.

China Money Rate Tumbles Most Since 2011 as PBOC Injects Cash 


A recent Bloomberg article details actions by China's central bank yesterday to ease on ongoing cash crunch which had driven up short-term borrowing costs and put downward pressure on Chinese equities. After the central bank injected funds for the first time in three weeks, China's benchmark money-market rate declined the most it has in a day since February 2011. The ongoing tight money conditions in China have many economists worried that growth may slow even further in 2014, which would have bearish implications for emerging market equities, and the country's money-market rate will be important to watch in early 2014 for evidence that policy makers are getting more aggressive about providing liquidity to the market.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Thoughts on Charitable Inclinations

With the end of 2013 approaching, many of our clients are thinking about what charitable gifts they want to make. Here are a few tips on giving effectively and maximizing the tax deductibility of your gifts.

Keep the Calendar in Mind

For tax purposes, donations made by check can usually be deducted if they are postmarked by December 31; however, if you are making a large donation, check with a tax advisor since industry practices often dictate that checks must be received by the charity and cashed before the end of the year. The IRS requires donations in excess of $250 to be documented more extensively, and you must provide the name of the organization, donation amount, and whether you received any goods or services from the charity in exchange for the donation.^[1] Online donations are processed instantly, and you may want to consider making last-minute donations by credit card instead of by check if you are concerned about this issue.

Avoid Giving Cash

In order to deduct charitable gifts on your taxes, all donations must be substantiated by a receipt, cancelled check, or written acknowledgement by the charity.^[2] If you frequently give cash to organizations that solicit in front of supermarkets, malls, or local stores, you may be losing out on a major deduction. Consider supporting these organizations by writing a single check or asking for a receipt for each cash donation.

Consider Alternative Sources of Gifts

Not all donations need to come from your checking account. If you are subject to Required Minimum Distributions from your IRA, you can still make qualified charitable donations (QCD), which will count towards your annual RMD amount and will also be excluded from your 2013 taxable income. IRA owners can distribute and exclude from their income up to $100,000 in direct donations to qualified charities - typically, those that meet IRS 501(c)(3) regulations. The QCD provision will expire at the end of 2013 unless Congress takes action to extend it.^[3] Another option for taxpayers is to give appreciated securities, which will qualify for tax deductions at their full fair market value.

Give Locally

One of the best ways that you can make an impact in your community is to donate to local organizations or community foundations. Community foundations focus on local needs and can help you identify areas of need and show you how to make the greatest impact with your gift. Even small contributions can make a big difference to charities like food banks, homeless shelters, and animal welfare groups. In addition, many community foundations now have donor-advised funds that can help simplify the donation process.

Research Charities Carefully

New charitable organizations open their doors every day, and it’s wise to scrutinize potential gift recipients carefully before making a donation. Online tools like CharityNavigator.org or GuideStar.com are a great way to check out the legitimacy of organizations and ensure that your donations will be used as promised. It’s usually wise to avoid donating to organizations that rely on paid fundraisers since those (for-profit) fundraising firms often receive a significant percentage of the funds donated. Here are a few best practices for charitable giving:

         Clarify your beliefs and donation objectives

         Research organizations carefully to ensure legitimacy and tax status

         Make sure their mission aligns with your values

         Give proactively (not necessarily in response to appeals)

         Avoid the middleman and make donations directly to the organization or foundation of your choice

         Trust your instincts

         Don’t give cash and always document your donations

         Consider developing a long-term relationship with charities that are a good fit for your values

If you have any questions about the information we’ve presented or would like more information about charitable giving, please give us a call, we’d be delighted to lend a hand.

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^[1] http://www.irs.gov/uac/Eight-Tips-for-Deducting-Charitable-Contributions

^[2] http://www.irs.gov/uac/Eight-Tips-for-Deducting-Charitable-Contributions

^[3] http://www.irs.gov/Retirement-Plans/Charitable-Donations-from-IRAs-for-2012-and-2013

Perspectives from Above the Noise – Week of December 16, 2013

3 Stories in the global economy that should not go un-noticed

Stocks experienced another down week, driven largely by low volume, anticipation of a budget deal, and investor caution before the Federal Open Market Committee (FOMC) meeting. The House passed a breakthrough budget deal that will avoid a government shutdown in January and blunts the next round of automatic sequestration cuts. The Fed’s FOMC meeting will be in focus this week as investors wait to see whether the central bank will send out 2013 with a bang or a whimper.

For the week, the S&P 500 lost 1.65%, the Dow fell 1.65%, and the MSCI EAFE (developed international) lost 1.57%.

Here are the 3 stories this week that rose above the noise:

U.S. Crude Oil Output to Climb Toward Record by 2016

Based on projections, U.S. crude oil production will approach a record by 2016, climbing to the highest level in 46 years as rising output from shale formations lifts domestic supplies, reducing the nation’s need for foreign oil. The surging production is having a positive impact on the country’s persistent trade deficit as consensus expectations now expect the trade deficit to narrow to only 2.4 percent of GDP compared to 5.8 percent in 2006. Domestic output will grow annually by about 800,000 barrels per day to 9.5 million barrels per day by 2016, nearing the record level of 1970.

Production Gain Shows U.S. Factories to Spur Growth: Economy

Strength in manufacturing continues to provide support for continued U.S. economic health in 2014. A report released today by the Federal Reserve showed factory production grew 0.6 percent in November, which followed a 0.5 percent gain in October. Production is up 1.5 percent over the past five months, three times more than the 0.5 percent gain in the first six months of the year.

The automobile space has been one of the underlying driving sectors as auto assemblies climbed last month to an 11.6 million annual rate, the most since June 2006. Capacity utilization and productivity are also at multi-year highs supporting the U.S. manufacturing story.

Companies Turning Again to Stock Buybacks to Reward Shareholders

A Washington Post article examines the recent surge in companies repurchasing shares of their stock in the open market. As detailed in the article, total share buybacks are approaching the record high level reached in 2007. We have mixed feelings on share buybacks for many of the reasons noted in the article. Generally, steady repurchase programs done from free cash flow have the potential to create lasting shareholder value in our view.

However, broadly speaking, companies have had a tendency to aggressively repurchase shares only when times are good and profits very high, for example in 2007. This in many cases had led to ill-timed repurchases and with the valuation of U.S. stocks arguably becoming stretched the surging buybacks may prove to be neutral at best for long-term shareholder value.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of December 9, 2013

3 Stories in the global economy that should not go un-noticed

Economic data dominated most of last week’s action as investors waited for the latest news on job creation, economic growth, and manufacturing. Stocks ended their winning streak, preoccupied by the Friday jobs report, but quickly regained steam after data revealed a rosy jobs picture.

For the week, the S&P 500 lost 0.04% (though it jumped 1.1% on Friday), the Dow lost 0.41%, and the MSCI EAFE (developed international) fell 2.16%.

Here are the 3 stories this week that rose above the noise:

After Detroit, Who Will Cut City Pensions Next?

Detroit has the ability to reduce municipal employee pensions, potentially by a significant amount, to 23,500 retired city workers following a Federal bankruptcy court ruling last week that granted Detroit the capacity to restructure $18 billion in long-term debt.

The ruling sent a strong message to several states and major cities throughout the country that have poorly funded pension systems. For example, nine states have pension systems that are 60 percent underfunded and the 61 cities with the most underfunded pension systems have a combined $217 billion shortfall between what they have promised in pension benefits and what they have saved to fund their pension systems.

Government pension reform will be a major topic over the next decade. Last week, for instance, Illinois passed legislation that will reduce state employee retirement benefits in order to lessen the growing impact on the state budget and close the gap on Illinois’ significantly underfunded pension system.

Fed’s Bullard Sees Higher QE Taper Odds as Labor Market Improves

Citing recent improvement in jobs data, Federal Reserve Bank of St. Louis President James Bullard expressed his opinion yesterday that the odds have increased for the Fed to soon begin reducing its asset purchases, also known as quantitative easing (QE).

A recent Bloomberg article details the Bullard comments and similar recent comments from other Fed officials which suggest some members of the Federal Open Market Committee are ready to begin the QE tapering process. However, the majority of economists in a December 6 Bloomberg News survey still expect the Fed to wait until next year to begin winding down its asset purchases rather than at its upcoming December 17-18 meeting.

Bullard tempered his comments by noting that he remains concerned about too low inflation. Nonetheless, the article is worth reading for some insight into the thinking of Fed officials heading into next week’s highly anticipated policy meeting.

Solid Pace of Expansion Seen in China

Chinese economic observers will be keeping a keen eye on the annual Central Economic Work Conference which began in Beijing on Tuesday, as China’s top leaders are expected to map out the country’s economic policy agenda for the coming year.

Of particular interest is whether the official 2014 growth target will remain at 7.5 percent or trimmed closer to 7 percent. Recently reported economic data has been encouraging. Industrial output, retail sales, and investment in fixed assets came in with solid year-over-year gains. This data followed the Sunday release of November exports which came in well above analyst expectations.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of December 2, 2013

3 Stories in the global economy that should not go un-noticed

Last week’s shortened Thanksgiving trading schedule did not slow the market’s continued advance, as the month came to a close. November was another strong month for the financial markets. The S&P 500, a benchmark of mostly larger companies, gained 3.05%-finishing the month with its eighth consecutive weekly gain, its longest such streak in nearly a decade.

International stocks meanwhile did not fare quite as well, with developed international markets up 0.17%. Emerging markets slipped last month, losing 1.45%. Bond prices also moved lower last month, as the overall bond market lost 0.37%. The 10-year Treasury yield finished the month at 2.75%.

For the week, the S&P 500 gained 0.06%, the Dow grew 0.13%, and the and MSCI EAFE (developed international) added 0.83%.

Here are the 3 stories this week that rose above the noise:

Kiplinger's Presents Economic Outlook for 2014

As 2014 rolls into sight, Kiplinger outlined its economic outlook for next year. It expects the U.S. economy to continue to slowly build momentum with GDP growth hitting 2.6% in 2014, compared to only 1.7% for all of 2013. U.S. unemployment is expected to fluctuate between 6.9% and 7.2% until mid-2014 although the U.S. economy should be able to reliably generate at least 200,000 jobs per month. Inflation is expected to tick up slightly to 2%. The housing recovery is expected to continue with existing and new home sales expected to rise 4% and 16% year-over-year, respectively. Business spending is projected to gain 4.5% and the U.S. trade deficit is anticipated to continue to narrow by about 5% due to reduced oil imports.

While the recovery from the punishing 2007-08 recession should remain the slowest since World War II, U.S. quarterly growth is expected to reach an annualized pace of 3% by mid-2014, making the economy more durable in the face of challenges that include policy uncertainty at home as well as soft growth among major trade partners.

Foreign Stocks for the Long Run

With U.S. equities outperforming foreign equities over the past year, we are often asked why include foreign stocks1 in a portfolio? A recent analyst’s article provides some statistical insight into the diversification benefits of owning foreign equity. "Although the returns of foreign stocks have not kept pace with U.S. stocks, and their risk was higher, a portfolio allocated to 70% in U.S. stocks and 30% in foreign stocks generated a higher risk-adjusted return than a portfolio of all U.S. stocks." The 70/30 U.S. to foreign stock ratio produces the highest risk-adjusted return from 1970 to Oct 2013.

Additionally, if there is a regression toward the historic mean, foreign stocks should do well in a relative sense. However, given the lack of predictability in knowing when foreign equities will outperform, inclusion of the asset class in a strategic asset allocation strategy seems a reasonable approach.

U.S. Manufacturing Sector Expands Much More than Expected in November

The Institute for Supply Management's (ISM) manufacturing index rose to 57.3 in November (above 50 signals expansion), ahead of 56.4 in October. U.S. manufacturing has increased six consecutive months and accelerated at its fastest pace since April 2011 in November. Moreover, the ISM new orders index and employment index increased at their fastest rate this year, which is a strong leading indicator for factory activity over the next four to six months. Global manufacturing is also expanding, but is lagging the strong acceleration that is occurring in the United States.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of November 25, 2013

3 Stories in the global economy that should not go un-noticed

Stocks climbed again as the S&P 500 and Dow notched their seventh straight week of gains on positive economic data. Optimistic economic data was behind a lot of the market movement last week. Initial jobless claims fell to their lowest level since the government shutdown; though seasonal factors may have affected the data, the four-week moving average (a less volatile measure) supports the trend.

For the week, the S&P 500 gained 0.37%, the Dow rose 0.65%, and MSCI EAFE (developed international) fell 0.01%.

Here are the 3 stories this week that rose above the noise:

Buying Stocks at Record Highs: Will You Be Sorry?

The Dow closed above 16,000 for the first time last week and there is a wide range of opinions about how attractive U.S. equities are at the current level. For example, billionaire hedge fund manager Carl Icahn is “very cautious” on U.S. stocks, while Warren Buffett feels that U.S. stocks are valued in a “zone of reasonableness.”

According to a recent blog post on Wall Street Journal.com, answering the question “How much can I stand to lose before I bail out?” is the key factor for investors sitting on the sidelines and interested in buying equities. Even if U.S. stocks are valued in a “zone of reasonableness,” external factors can drive stocks into a bear market, where 20 percent or more losses occur. The article states, “…the best indication of whether you can take such a big hit is what you did the last time something similar (bear market) happened. If, in 2008 and 2009, you bought more of any asset that fell in price, you are the rare investor whose intentions and actions may match. If you did nothing, you at least didn’t turn temporary losses into permanent ones by selling out at the bottom. If, however, you did bail out, then don’t fool yourself into thinking you won’t do it again.

Faucets at $1,000 Abound as Home Equity Spigot Opens

One impact of the recovery in housing prices that has occurred over the past two years is a recent resurgence in home equity lines of credit (Helocs). A Bloomberg article details evidence that homeowners are confident enough in home values and the job market to tap into the equity in the homes and banks are becoming more willing to make such loans.

While we don’t expect or wish to see a return to the excessive use of such loans that characterized the years leading up to the housing bust, a modest recovery in home equity loans does have positive near-term economic implications and may provide an economic tailwind in 2014 given the recent run-up in home values.

Market Sees Little Risk of Rising Short-term Rates

A posting on the Econbrowser blog provides a very good analysis of how the market seems to expect the next Fed tightening cycle to play out. Based on the forward curve, market participants are currently pricing in a very low probability that the Fed begins increasing short-term rates before 2015 and sees rates increasing much more slowly after that than they have in prior tightening cycles.

While the prospect of the Fed tapering its quantitative easing program in the coming months may increase financial market volatility, this analysis suggests the Federal Reserve’s communication policy has been effective in setting long-term interest rate expectations which may help limit the impact of its expected tapering announcement.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of November 18, 2013

3 Stories in the global economy that should not go un-noticed

All eyes were on the Senate confirmation hearings for Federal Reserve chair nominee Janet Yellen last week. The hearing didn’t generate any bombshells but confirmed Wall Street’s belief that the Fed will not be in any hurry to taper its bond-buying programs. Yellen also made it clear that under her leadership, the Fed will take on greater supervision of banks.

Meanwhile, Stocks climbed to record again with the S&P 500 and Dow closing out a sixth straight week of gains despite some volatility. For the week, the S&P 500 gained 1.56%, the Dow rose 1.27%, and the MSCI EAFE (developed international) gained 1.68%.

Here are the 3 stories this week that rose above the noise:

Homebuilder Sentiment in U.S. Held in November at Four-Month Low

The National Association of Home Builders sentiment gauge indicated that homebuilders, as a whole, have a slightly less optimistic outlook for real-estate market conditions than at any point over the last four months. Although homebuilders’ outlook remains positive, their sentiment receded slightly this month because of rising construction costs, declining buyer traffic, and a weaker sales outlook.

Homebuilders’ confidence has come a long way since the depths of the recession when new home construction bottomed at 478,000 units in 2009, well below the average of 1.4 million new homes constructed annually during the pre-recession market cycle. New housing starts are still significantly below pre-recession levels, but are on pace to nearly double this year relative to the 2009 bottom in home construction.

Fed Ponders How to Temper Tapering Without a Rate Increase

One of Janet Yellen’s first challenges as U.S. Federal Reserve Chairman will be figuring out how to cushion against a lurch in interest rates when she pares back the pace of the central bank’s bond buying. After sending 10-year Treasury yields more than a percentage point higher by fueling taper expectations in May and June, policy makers are now grappling with their options when they do reduce debt purchases, likely next year, that have swelled the Fed’s balance sheet to a record $3.9 trillion.

This issue will likely be at the forefront of investors’ concerns in 2014. Current Fed Chairman Ben Bernanke said recently: “We’re in unprecedented circumstances, we’re using policies that have never really been tried before – and multiple policies – and we’re trying to explain to the public how we intend to conduct these policies.”

Small No Longer Looks Quite So Beautiful

A recent article from the Financial Times details the current disagreement taking place among investment analysts regarding the outlook for small-cap equities. From the author’s point of view, the valuation of small-cap stocks has become very stretched relative to large-caps.

However, several prominent strategists believe small-cap outperformance will continue in the intermediate-term due to favorable macro conditions. In our view, with the valuation of small-caps reaching the upper-end of historical norms a modest reduction of small-cap exposure in 2014 seems warranted.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of November 11, 2013

3 Stories in the global economy that should not go un-noticed

Two major economic reports accounted for a lot of the action last week: a third-quarter GDP estimate and the October jobs report. October employment soundly beat expectations, adding 204,000 new jobs; however, the overall unemployment rate ticked higher from 7.2% to 7.3%. It’s hard to know how accurate the numbers are given the disruption of the government shutdown last month. We’ll know more once November numbers are available.

Despite some volatility, the S&P 500 and Dow hit their fifth straight week of gains, boosted by an unexpected jobs report and a rosy Q3 Gross Domestic Product (GDP) estimate. For the week, the S&P 500 gained 0.51%, the Dow gained 0.94%, and the MSCI EAFE (developed international) lost 0.64%.

Here are the 3 stories this week that rose above the noise:

Beware of Falling Gas Prices

The average price of gasoline nationally is $3.19 per gallon and could fall below $3 per gallon this winter. The recent drop in fuel prices has largely been credited to higher domestic oil supplies from a boom in U.S. oil drilling, but this article makes the argument that lower demand is also having a large impact on lower gasoline prices. Total miles driven by U.S. drivers has increased recently, but is 3 percent below the pre-recession peak in 2007. Many factors are contributing to fewer miles driven in the U.S. including high unemployment, an aging population and a smaller percentage of the population living in the suburbs.

A recent Bloomberg piece points out, “while some analysts are applauding what the drop in gasoline prices means for consumer spending, I am much more concerned with the demand side of the equation. The economy remains filled with soft spots and pockets of weakness.”

New Threat to Japan’s Growth

Central Bank stimulus, or quantitative easing, has become popular in recent years with the most recent example coming from Japan’s economic revival experiment. However, Japan is expected to report this week that “Abenomics” – Prime Minister Shinzo Abe’s master plan involving weakening the yen and temporarily boosting infrastructure spending – is faltering. Economists polled by The Wall Street Journal say Japan’s economy likely posted annualized growth in GDP of only 1.7 percent in the third quarter, slower than the 2.8 percent rate for the U.S. and a sharp deceleration from the 3.8 percent and 4.1 percent rates of the prior two periods.

Since Japan is currently the world’s third-largest economy and the longer-term efficacy of quantitative easing is uncertain, investors will be watching closely to see if Japan’s economic experiment can regain traction in the quarters ahead.

Treasury Yields Climb to Eight-Week High Amid Fed Tapering Bets

Following yesterday’s Treasury market closing for Veteran’s Day, yields on U.S. Treasuries rose to their highest levels in eight weeks, as recent stronger-than-expected economic data has increased the likelihood that Fed tapering may come sooner than initially thought. The market reaction to positive data was most apparent following the November 8 jobs report release. While speculation is that the Fed may begin tapering at its December meeting, the median expectation places that date in March, according to a Bloomberg survey of 32 economists.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of November 4, 2013

3 Stories in the global economy that should not go un-noticed

Early last week, the FTSE All-World equity index rose to a near six-year high, indicative of the global risk appetite for stocks. But by Wednesday afternoon stocks were modestly weaker after the policy statement from the Federal Reserve was interpreted as less dovish than some had predicted. The Fed did, however, maintain its current pace of highly accommodative bond-buying at this week's meeting, as had been widely expected.

For the week, the S&P 500 gained 0.11%, the Dow gained 0.29%, and the MSCI EAFE index (developed international) lost 1.47%.

Here are the 3 stories this week that rose above the noise:

The Disinflation Phenomenon

A recent post from The Economist Buttonwood blog details the continued disinflationary pressures that are evident in many developed countries, most notably in Europe. With measures of inflation in Europe falling to four-year lows, there is growing speculation that the European Central Bank will take further aggressive steps to ease monetary policy.

As the author explains, global disinflationary pressures are likely at least partially the result of continued contraction in bank credit. Continued low inflationary pressures suggest central banks are likely to maintain very accommodative monetary policy in the coming months.

Americans’ Debt Hangover Seen Ending in Boost to Growth

American consumers have been reducing household debt over the last five years and now appear well positioned to increase borrowing and spending. The percentage of household income that is allocated to paying debt dropped to a record low last year.

The rapid increase in federal deficit spending following the 2008-2009 financial crisis helped offset some of the negative impact on the U.S. economy from consumer deleveraging, but now the federal government is beginning to implement fiscal austerity to shrink the deficit. According to Moody’s Economist Ben Garber, “Consumers taking on more debt at a time when the deficit is shrinking would be a strong positive for the economy. This will help offset some of the fiscal austerity that we’re experiencing.”

Stocks Soar Eerily High: Where does S&P go from here?

A blog post from The Wall Street Journal provides some interesting notes on the current market rally. On the positive side, when the S&P has performed strongly from January through October, the index has historically averaged an additional 5.7 percent gain during the final two months of the year.

One area of concern however is the fact that the market has not seen a 10 percent correction since October 2011 (25 months ago). According to S&P Capital IQ, “since 1946, the S&P 500 has gone 18 months, on average, between 10 percent drops.”

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Measuring the Effects of Affordable Care Act, a.k.a. Obamacare

The Patient Protection and Affordable Care Act, commonly known as the Affordable Care Act (ACA) or “Obamacare,” has been at the center of the recent government shutdown and debt ceiling debates as well as a source of controversy in the media. In order to better understand the issues, let’s delve past the hype and discuss how Obamacare may affect investors and the economy.

What is Obamacare?

Obamacare is a set of health reforms that was passed by Congress and signed into law in March 2010. Considered the biggest extension of federal health care benefits since the establishment of Medicare and Medicaid in 1965, Obamacare will let some 47 million Americans who currently lack insurance to purchase various types of government-sponsored health coverage. The stated purpose of the bill is to increase the number of Americans covered by insurance and decrease the cost of health care in the U.S.

The centerpiece of the health reform bill are the insurance exchanges, where people who do not currently have health insurance will be able buy it. The insurance marketplaces opened for enrollment on October 1, 2013 and the ACA will begin delivering insurance coverage on January 1, 2014. Among other important changes, Obamacare also bars insurance companies from denying benefits based on pre-existing medical conditions like pregnancy, cancer, or disability. Insurers must also justify any insurance premium increase over 10 percent.

Most Americans may not be directly affected by Obamacare. If you’re one of the 80 percent of Americans who get insurance through an employer or the government, it’s very unlikely that you’ll ever directly interact with Obamacare’s insurance exchanges. Obamacare matters most for the 20 percent of Americans who are uninsured or purchase individual private (non-group) insurance. Source: Washington Post Blog

Why is Obamacare controversial?

The ACA has drawn a significant amount of opposition and most of the controversy is due to a fundamental disagreement about the idea of universal health insurance. Opponents to the law think that Obamacare will lead to the disruption of existing health plans, increase the costs of insurance, and result in higher costs to businesses and employers.

There is also opposition to specific aspects of the new regulations, such as the employer mandate, a penalty that will be incurred by businesses with more than 50 employees that do not offer health insurance to their full-time workers. Some economists worry that this provision will act as an incentive for employers to substitute part-time workers, thus having an adverse effect on the labor market. Although the employer mandate has been delayed until 2015, there is already evidence to suggest that some employers are cutting worker hours to avoid falling under ACA provisions.

What does Obamacare mean for investors and the economy?

According to estimates prepared by the Congressional Budget Office (CBO), Obamacare will reduce the federal deficit by $210 billion over the 2012-2021 period because revenue will significantly exceed expenses. A major source of revenue will be higher Medicare taxes, new annual fees on health insurance providers, pharmaceutical companies, and drug manufacturers, a new 40 percent excise tax on so-called “Cadillac” insurance policies, and reductions in Medicare reimbursements for hospitals that don’t meet standards of care. The CBO also believes that the ACA will also extend the solvency of Medicare by an additional 8 years.

On the other hand, economists lack a clear understanding of the effects provisions, like the employer mandate, will have on the labor market, or how Medicare reimbursement rates will affect the healthcare industry. It’s likely that these effects won’t be visible for years.

When attempting to understand how Obamacare may affect you as an investor, it’s important to keep your personal political views in check. Regardless of your opinions about the ACA, there are some objective conclusions that we can draw about how different sectors may be affected:

• Approximately 50 million new health care consumers will be created and demand for medical services and equipment is likely to rise as a consequence. 
• Hospitals will no longer be on the hook for free emergency room care, meaning that they will be able to drastically reduce unreimbursed patient-service costs. 
• Insurance companies will see their earnings and profitability affected by ACA provisions as well as by the addition of previously uninsured Americans. 

Conclusions

It’s impossible to know exactly how the ACA will affect markets, but we know that new regulatory environments often provide opportunities for flexible investors with a long-term outlook. In the short term, uncertainty around the ACA rollout and political debates may lead to increased volatility; however, we encourage our clients to focus on their long-term objectives and not to worry too much about short-term market movements.

We hope that you’ve found this post interesting and informative. If you have any questions about the information we’ve presented or want to know how the ACA may affect your investments, please let us know; we would be happy to discuss your concerns. As always, it is our sincere pleasure to be of service.

Perspectives from Above the Noise – Week of October 28, 2013

3 Stories in the global economy that should not go un-noticed

After a delay of several weeks, investors finally got a look at September’s jobs report and the news was mixed. While the unemployment rate dropped to 7.2%, hiring appears to have slowed. On a more positive note, third quarter earnings have been slightly better than expected with earnings growth averaging 6.8% among the 243 S&P 500 companies that have already reported in. 

Markets extended their post-deal rally for another week, putting up several new records: The S&P 500 closed out the week at another all-time high, while the Nasdaq ended at a 13-year high. No records yet for the Dow, but it’s putting up a good fight, gaining 5.4% over the last 13 trading sessions.

For the week, the S&P 500 gained 0.88%, the Dow increased 1.11%, and the Nasdaq grew 0.74%.

Here are the 3 stories this week that rose above the noise:

Silicon Valley: Feel the Froth

An article from The Wall Street Journal details some signs of excessive speculation beginning to take hold in the technology sector. A number of highly speculative companies with soaring valuations are discussed, an indication that investors’ willingness to take on risk in an effort to generate large gains is reaching potentially concerning levels.

As the authors note, market frothiness remains well below the mania witnessed during the late-1990s, but recent speculative activity could be an early indication that investor psychology has become overly exuberant.

Business Confidence Booms, While Consumer Confidence Slumps

Business confidence is improving among chief financial officers, according to a CNBC survey of CFOs from multinational corporations located in Europe and Asia. Nearly 70 percent of the respondents anticipate an improvement in the global economy over the next six months and only 9 percent foresee a decline in economic growth. Additionally, 56 percent of respondents plan on expanding their workforce and 4 percent plan to implement layoffs within the next six months. The biggest concern over the next six months mentioned in the survey is slowing growth in emerging-market economies. Over 80 percent of respondents mentioned it as a concern.

Meanwhile, consumer confidence slumped according to yesterday’s Conference Board report, which showed a decline in its index to 71.2 from a revised 80.2 last month. It is a disappointing number considering the median forecast in a Bloomberg survey of economists was 75.

The partial government shutdown contributed to negative sentiment in both present conditions and consumer expectations for the next six months. More Americans expect their income to decline over the next six months which coincides with less Americans planning to buy homes and cars. Real-estate sales have begun to ease as higher prices and mortgage rates sideline potential homebuyers.

U.S. Housing Recovery Continues

Home prices in 20 U.S. cities rose in August from a year ago by the most since February 2006 as stronger demand boosted values. The S&P Case-Shiller index of property prices increased 12.8 percent from August 2012, after a 12.3 percent gain in the year ended in July.

The ongoing housing recovery continues to be a source of strength for the U.S. economy especially given the headwinds created by lower government spending due to the sequestration deal struck in Congress late last year. Economists noted that every area reported higher selling prices indicating broad participation in the recovery. As of August, average home prices in the U.S. were back to mid-2004 levels and the 20-city index was up 22.7 percent from its March 2012 low.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.