Perspectives from Above the Noise – Week of January 28 2013

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

Investors enjoyed another positive week as major U.S. indices hit multi-year highs. The S&P 500 closed above the 1500 level for the first time since December 10, 2007, climbing 2.1%. In Washington, the House of Representatives punted on the debt ceiling debate, voting last week to raise the debt ceiling for four months without addressing important deficit issues. In more positive news, jobless claims fell for the second week in a row to the lowest level since January 2008.

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

The Biggest Housing Bubble in the World Is in…Canada?
A recent article from The Atlantic summarizes growing concerns over housing prices in Canada, which have remained resilient thus far despite efforts by Canadian authorities to softly deflate housing values. We have a generally positive view of the Canadian economy, which we believe has some of the best demographic trends in the developed world and a wealth of natural resources. However, a key risk to the outlook is the potentially overvalued housing market and high level of consumer debt summarized in this article, which we will be watching closely throughout 2013.

Durable Goods Demand Points to U.S. Factory Pickup

Orders for durable goods strengthened in December, improving by 4.6 percent according to the Commerce Department — ahead of expectations for 2 percent growth. The sharp increase in durable goods orders at year-end provided evidence that improving business confidence for increased global growth outweighed concern for economic contraction resulting from the fiscal cliff situation.

Improvements in auto sales, aircraft and manufacturing helped boost orders for durable goods. Durable goods orders are volatile from month to month, but have risen for four consecutive months for the first time since the metric has been measured (1992).

Time to Celebrate?

Only a short time ago, many were worried that the European debt crisis would spiral out of control, ultimately leading to bond defaults and a breakup of the euro currency. Fast forward six months and bonds of many peripheral economies such as Ireland have been on fire, while yields have dropped to more sustainable levels.

Spanish 10-year yields have dropped below 5 percent for the first time in nearly a year. While fear over Europe has subsided, this doesn’t mean policy makers have taken the quiet period as an opportunity to fix the continent’s underlying issues of slow growth, high unemployment and large deficits. Citigroup’s Willem Buiter puts it best, “European policy makers only move at gunpoint, and the only gun around is the market.”

Perspectives from Above the Noise – Week of January 21, 2013

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

In a rare confluence of events, Monday was both a national holiday and the inauguration of President Obama’s second term, starting the week off fairly quiet for markets. There are also relatively few economic reports released this week, meaning that traders will turn their attention to remaining earnings reports from firms like Google (GOOG), Starbucks (SBUX), and McDonald’s (MCD). Investors will also be paying close attention to new reports about the strength of the housing market, which are widely expected to show a continued recovery.

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

House Republicans Retreat on Debt Ceiling Fight by Suspending the Limit until May 19

The Republican-led U.S. House of Representatives announced it plans to vote on a bill as soon as January 23 to temporarily suspend the U.S. debt limit until May 19. The House suspension plan is accompanied by a caveat: Congress must pass a budget resolution for the next fiscal year by April 15. If either the Senate or the House fails to pass a budget resolution by that time, pay for the members of that chamber will be withheld in an escrow account until they approve one.

Cheap Stocks and Reform Hopes Lift China

This year’s movement in the Chinese equity markets is being closely watched by analysts and investors. After falling to a three-year low in the first week of December, the benchmark Shanghai Composite Index has increased 18.4 percent to a seven-month high, while trading volumes have spiked to their highest levels since early 2011.

This CNBC article attributes the gain to the fact that Chinese equities were too cheap based on price-to-earnings ratios falling significantly below historic norms. Additionally, recent economic data has pointed to a stronger economic outlook. However, some analysts caution that the best of the gains have already occurred and are concerned about the sustainability of the economic recovery.

View from the Bridge

A recent article from The Economist discusses current and potential future trends in global trade as they relate to one of America’s busiest ports: Long Beach, Calif. The port of Long Beach can be viewed as an important indicator of the health of U.S. trade with Asia. Over the past two decades, trade with Asia has increased dramatically, and the outlook for the future remains strong. More than $5 billion is being spent on new infrastructure in Long Beach and Los Angeles to handle larger ships. Exports out of Long Beach are also increasing, up more than 38 percent since 2009. Future shipments of liquefied natural gas are likely as the U.S. develops large gas deposits and China’s demand for energy continues. Other trade routes such as the China-Brazil connection and the Panama Canal may become larger hubs and compete with Long Beach. However, future activity paints a bright picture for future U.S. trade with Asia.

The 3 "Other" Risks to Retirement Income Success

Clients that work with our planning team to navigate through their transition to retirement are fully aware of what we call the 3 Largest Risks—namely Longevity, Behavioral, & Timing Risk (for a detailed entry, you can read another of my blogs HERE).  However, as we begin to roll through 2013, we can also identify 3 other risks that are worth noting, due to the confluence of current economic forces.

Inflation Perils

As the Fed continues to pump $40 billion-a-month in bond purchases, there is a risk that U.S. currency will ultimately devalue, leading to higher inflation rates. This can result insufficient retirement balances to achieve an individual’s goals because of faulty assumptions within a financial plan.

The figures look worse if you actually look under the hood of the factors which calculate Consumer Price Index (The indicator economists use to measure inflation).  CPI is calculated with a principle known as substitution.  Substitution simply states that when the cost of fresh vegetables creeps too high, the government calculation assumes you buy canned veggies—and thus any additional inflation on vegetables is avoided.  This can make inflation seem more bearable than reality of the situation.

Potential Rising Taxes

Even after the recent tax law changes, I believe there is the likely possibility of an increase in income tax over the long term as government will need more revenue to pay for social programs and national debt.  With the debate over the debt ceiling set as the next big Washington grudge match later in the quarter, it’s a question as to whether potential tax increases are completely off the table. 

While healthcare is typically cited as the greatest retirement expense, increasing federal, state, & local sales tax could start to eat into your retirement wallet.  Required minimum distributions at age 70 can also force to pay tax on withdrawal (taxed as income whether you need it or not).  To help plan for this impact we work with clients on weighing the pros and cons of pre-RMDs or partial Roth conversions.  Ultimately, if not managed properly, taxes may reduce spendable cash and cash saved for retirement.

Weakened Day-to-Day Budget Management

There was a decline in personal saving rates among employees in the first half of 2012 compared to the same period in 2011. This can partially be attributed to more employees requesting retirement plan loans and hardship withdrawals.  While there is no doubting that the last recession and protracted unemployment has been a weight on some people’s ability to save, it is time for revisit the idea of a budget and get back to the basics of cash-flow management.  If you do not know what you are spending and where you are spending it on a monthly basis, there are a number of tools out there to help you sort this out.  Our clients have access to a spending tool through our financial planning portal. 

Not only is budgeting helpful to give your current savings a boost, but it can also provide a clearer picture of your expense needs now and during your projected retirement.


With so many risks that seem out of control, working with a guide through retirement transition is a great idea.  Independent perspective rooted in financial planning is the best place to start.

Perspectives from Above the Noise – Week of January 14, 2013

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

Markets were upbeat last week, closing positive for the second week in a row as traders digested the first fourth-quarter earnings reports and fresh economic data. The S&P 500 was pushed to a new five-year high, gaining 0.38%, while the Dow rose 0.4%, and the Nasdaq increased 0.77%. With equities at five-year highs, it’s time to start thinking about whether the fundamentals can support further upside. 

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

Bernanke Downplays Inflation Risk of QE3 

One of the primary concerns of the Federal Reserve’s recent bond-buying programs and zero-interest-rate policy is that the backdrop for significant future inflation is being set. Recently, many Fed governors have expressed their concern that the Fed has pushed prices of certain bonds to unsustainable levels.

However, Fed President Ben Bernanke recently responded to these concerns publicly saying he doesn’t believe “significant” inflation will be an issue, and the Fed has many tools to exit its current policy. Until unemployment and economic growth improve more, the Fed’s current policy will likely continue.

The Emerging-World Consumer Is King

In a recent article, The Economist highlights the growth of the global middle class over the next several decades, mostly from emerging markets. China and India only took a fraction of the time to double their income per capita relative to the U.S. and Great Britain during their rise to power, which has brought a sharp increase in the number of emerging-market consumers who have reached the middle class.

According to the Boston Consulting Group, as many as one billion Chinese and Indians will reach middle class status by 2020. Foreign firms, including Starbucks, Disney, and Louis Vuitton, have flocked to emerging markets to promote their brands to the growing middle class and capitalize on “the greatest increase in consumer purchasing power in history,” as The Economist states.

Information Technology Dividends Outpace All Others

In an indication of how much the market landscape has changed since the bubble of the late-1990s, the information technology companies in the S&P 500 are now paying more in dividends than companies in any other sector. This surprising fact was reported by Standard & Poor’s last week and detailed in this The New York Times article over the weekend.

As discussed in the article, the financial sector had been the largest dividend payer prior to the financial crisis and has recently been paying a rising share of S&P 500 dividends. As the large banks are allowed to increase dividend payouts from current low levels, it is likely financials will once again become the largest dividend-paying sector. Nevertheless, large technology companies have become important sources of dividend yield, which is quite a change from the bubble years.

Perspectives from Above the Noise – Week of January 7, 2013

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

Today marks the first entry in our new weekly column focusing a critical eye on 3 key items which we believe are worth taking note of. Each week we will focus on these news stories as a means to highlight what we feel to be important news from the global economy to your personal economy.

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

End of Stimulus? What's Behind Fed's Surprise Statement

In a surprise move, several Federal Reserve members said they want to end quantitative easing this year. The news sent ripples through financial markets last week when minutes of the Fed’s December 12 policy statement showed several members would like to stop the bond-buying program before the end of 2013.

The Federal Reserve’s asset purchases currently total $85 billion per month. While most economists and observers expect Fed policy to remain exceptionally accommodative through at least 2013, the comments are less “dovish” than expected and will likely increase the bond market’s attention to key economic data as the year progresses.

Wages a Balm for U.S. Workers Facing Payroll-Tax Shock
U.S. Congress agreed on a permanent extension of Bush-era income tax cuts for 99 percent of Americans last week, but most Americans will see their paychecks shrink in 2013 with the expiration of the temporary payroll tax cut that was in effect over the previous two years. The payroll tax that funds social security will increase to 6.2 percent from 4.2 percent, creating up to a $100 billion drag on the U.S. economy in 2013.

However, accelerating wage growth and decreasing gasoline prices may help offset the increased tax burden on American consumers. Additionally, rising home prices and four years of stock market gains are helping the American consumer gain back wealth that was lost in the 2008 market crash.

The Best Way to Debt Reduction? You Choose
As 2013 begins, the next major event the market has its eye on is the debt ceiling. MarketWatch’s Chief Economist Irwin Kellner gives a helpful overview of the battle that is likely to ensue between Democrats and Republicans. Much like the fiscal cliff, the cores of both parties are at opposite ends of the spectrum. Republicans favor cutting entitlement spending while Democrats favor raising taxes. In each case, these are positions that the opposing party would consider off limits. As it stands, it looks like we are in for another fight until the last minute and a deal that just gets us through to the next major deadline.

Roth Conversion Part II – New Option for Tax Diversification

2010 provided us all with a unique potential opportunity to convert existing IRA savings assets to Roth IRA regardless of earned income. This new tax freedom spawned much analysis on the current tax bill created by conversion versus the future of tax-free growth. Our practice held numerous workshops to discuss the pitfalls and the process. The new tax bill passed last week provides for a new Roth conversion consideration, as participants in tax-deferred retirement plans that also have a Roth feature will now have the option to convert tax-deferred savings to Roth.

Contributions to a traditional 401(k) (403b, 457, etc.) account are tax-deferred, with taxes paid at ordinary income rates when the money is withdrawn in retirement. When savers put money into a Roth 401(k) account, they pay taxes on the money upfront in exchange for tax-free withdrawals later.

The converted amount would be subject to income tax in the year of conversion, but, under a special rule, would be deemed to be exempt from the 10% tax on early distributions, regardless of whether the participant is under age 59 1/2. It does not appear that conversions would be subject to the 3.8% tax on the net investment income of higher income taxpayers.

It's important to note that unlike Roth IRA conversions, which can be reversed by the following October 15th, plan conversions are irrevocable and can't be undone.

So, should you consider conversion? Maybe…Consideration factors include your age; tax bracket now versus tax-bracket in retirement; whether your deferred retirement savings is earmarked for your use or for heirs; whether or not you have the funds outside of your retirement plan to pay the tax bill on conversion.

As usual this can be a sticky situation. Let us know if we can help you weigh the upside & downside of conversion for you situation.

Stopping Short of the Cliff — For Now…

After what seemed to be 7 week staring contest since the Presidential election, the Senate and White House were able to hammer out a last-minute 2am compromise to stave off going over the Fiscal Cliff—and with the House eventually voting to approve the plan on January 1, the debate surrounding the country’s fiscal crisis is essentially postponed.

And so we are left with the American Taxpayer Relief Act of 2012. In this commentary we will briefly outline the essential details of the plan as a primer for your potential tax impact for 2013, and touch on the fight yet to come later in early spring.

The Details 

According to Congressional sources, here are a few of the major provisions of the deal:

• Current tax rates will remain in effect for earned income below $400,000 for individuals and below $450,000 for couples. However, income tax rates will permanently increase from 35% to 39.6% for incomes above these thresholds.
• For earners in the top bracket, capital gains and dividend tax rates would return to 20% from 15%. (This was far more favorable for investors than the outcome that would have occurred without an agreement, whereby dividend income would have been treated as arned income and taxed at a top rate of 39.6%.)
   
• Postpones for two months the start of $1.2 trillion in automatic spending cuts known as sequestration.
   
• Raises $600 billion in revenue over 10 years through tax increases on wealthy Americans. • The alternative minimum tax was permanently indexed for inflation. (The lack of inflation indexing had resulted in more and more individuals falling under the requirements of the alternative minimum tax and required annual legislative patches to fix.)
   
• Provisions were reinstated that phase out personal exemptions and deductions for single filers making more than $250,000 and couples making more than $300,000.
   
• The estate tax rate was increased from 35% to 40% on estates of over $5 million.
   
• Tax credits included in the 2009 stimulus were extended for five years, including a child tax credit and a refundable credit for college tuition.
   
• The payroll tax, which had been temporarily lowered for the past two years, increased back to 6.2% from 4.2% for all workers' first $113,700 of income. As a result, a family earning $50,000 a year will see a reduction of after-tax income of $1,000. (This is not a tax increase, merely a return to normalcy. The tax is how the large entitlement programs of Social Security & Medicare are funded.)
   
• Other elements of the legislation extended long-term unemployment insurance for one year and prevented a 27 percent reduction in payments to Medicare providers for one year.
   

What’s Next

Almost as important as what was included in the bill is what was left out. Foremost among these issues is the debt ceiling, which was not increased as part of the legislation. The U.S. unofficially hit its debt ceiling on December 31 and the U.S. Department of Treasury is undertaking "extraordinary measures" in order to meet the country's obligations. It is currently estimated that the Treasury will not be able to pay all of its bills by late February or early March unless Congress acts to increase the debt limit.

The deal does nothing to reform entitlements or comprehensively address simplifying our tax code, and looks likely to increase political rancor in the near future.

The highly divisive deficit reduction, spending cut and entitlement reform issues are now expected to become part of the negotiations over raising the debt ceiling, which creates high risk of another congressional standoff and more investment market volatility in the first quarter of 2013. More specifically, we can expect debate over the following issues:

• Automatic spending cuts, half in defense and half in domestic programs, which will be delayed for two months and then kick back in March 1 unless Congress can identify other offsets to avoid the sequestration.
• A second sequester deadline looming in late March to cover the overspending since the first sequester.
   
• The government's spending authority, which expires on March 31 without an increase in the debt ceiling. 

And let's not ignore the fact that by voting for the bill, 85 out of 236 House Republicans essentially acquiesced to the largest tax increase since 1990, ensuring more divisions within the splintered House Republican caucus. This means political confrontation is likely to continue to dominate headlines for several more months.

Crisis was averted in the short term, but many important and divisive issues remain unresolved. As developments unfold in Washington, we will continue to update you on the effects of our political leadership's decisions on your finances.