Perspectives from Above the Noise – Week of June 24, 2013

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

As expected, news from the Fed dominated markets last week. Equities started the week with steady gains, suggesting that investors expected mostly reassuring words from the Federal Reserve meeting of governors. However, Wednesday's official FOMC announcement and subsequent comments by Ben Bernanke pushed markets to recent lows.

The Fed chairman stated that, should economic conditions continue toimprove, the central bank could reduce the pace of bond purchases. Recent economic data supports Bernanke's optimism.

For the week, the S&P 500 fell 2.11%, the Dow lost 1.8%, and the Nasdaq trimmed 1.94%.

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

China’s Central Bank PBOC Addresses Cash Crunch

A People’s Bank of China official said on Tuesday that the central bank will guide interest rates to a “reasonable range,” suggesting a potential end to the cash crunch that has gripped the country’s financial system this month. Concerns over China’s credit crisis have contributed to market volatility over the past several weeks.

However, recent analysis by other commentators suggests that the government has the capacity to absorb the private sector credit losses, should they occur. A weekend article in Barron’s estimated China’s bad debts could total $3.25 trillion (20 percent of total debt outstanding) compared to a formidable array of assets the government could use to fight off a financial crisis, including $3.1 trillion of central bank loan reserves and $3.4 trillion of foreign-currency reserves.

Additionally, China could privatize state-owned enterprises and take on more federal debt given its conservative 30 percent debt-to-GDP sovereign debt ratio.

Central Bankers Move to Soothe Market 'Exit' Fears

Since the beginning of May, when the Federal Reserve began to hint that tapering of its quantitative easing (QE) program may begin soon, yields on Treasuries have leapt. Many other central banks that have also implemented similar programs to QE have come out recently with comments that they do not plan to follow Bernanke’s lead and taper their asset purchase campaigns.

Both the Bank of England and the European Central Bank remain committed to monetary easing. Some central bankers have also made comments that the recent selloff in U.S. Treasuries may be an overreaction to the Fed’s tapering comments. “The Federal Reserve has merely said that the easing, in which it is still engaging, may taper at some point depending on economic conditions,” said Bank of England Governor Mervyn King.

Exit from the Bond Market Is Turning into a Stampede

The New York Times’ Dealbook section provided an overview of the recent volatility in the bond market which was triggered by statements from Fed Chairman Bernanke last week indicating that the strength of the U.S. recovery might allow the Fed to begin to reduce its asset purchases later this year.

The article includes a good summary of some of the factors driving the volatility, including leveraged bets by institutional investors that are being reversed and intense selling of bond mutual funds and ETFs by retail investors. Also noted are statements from Fed officials yesterday which appear designed to calm markets. As noted in the article, it is difficult to know when the stress in bond markets will subside and market participants will be closely watching for signs of stabilization in the coming weeks.

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

Who Needs Estate Planning?

It doesn’t matter how limited (or unlimited) your means may be, and it doesn’t matter if you own a mansion or a motor home.

Rich or poor, when you die, you leave behind an estate. For some, this can mean real property, cash, an investment portfolio and more. For others, it could be as straightforward as the $10 bill in their wallet and the clothes on their back. Either way, what you leave behind when you die is considered to be your “estate”.

If your estate is small, should you still plan? Well, even if you’re just leaving behind the $10 bill in your wallet, who will inherit it? Do you have a spouse? Children? Is it theirs? Should it go to just one of them, or be split between them? If you don’t decide, you could potentially be leaving behind a legacy of legal headaches to your survivors. This, quite simply, is what estate planning is all about – deciding how what you have now (money and assets) will be distributed after your lifetime.

If you don’t leave behind an estate plan, your family could face major legal issues and (possibly) bitter disputes. So we typically advise clients to do some form of estate planning. Your estate plan could include wills and trusts, life insurance, disability insurance, a living will, a pre- or post-nuptial agreement, long-term care insurance, power of attorney and more.

Did you know that your heirs could encounter legal hassles … even if you have a will? Basically, a will tells the world what you’d like to have happen, but proper estate planning is what provides the tools to make those things happen. While your will may state who your beneficiaries are, those beneficiaries may still have to seek a court order to have assets transfer from your name to theirs, and in such a case, those assets won’t lawfully belong to them until the court procedure (known as probate) concludes. Proper planning can help avoid probate. Estate planning can include items like properly prepared and funded trusts, which could help your heirs to avoid probate.

We generally recommend that you speak with a qualified legal or financial professional – one with experience in estate planning. We have several attorney contacts in the area we are happy to introduce you to. Once you are through the document preparation process, we can take you through a review of your titling and beneficiary designations.

Perspectives from Above the Noise – Week of June 17, 2013

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

Markets lost ground last week for the third week in the last four, pummeled by ongoing worry about the tapering of the Fed’s stimulus programs. Uncertainty about the longevity of Fed programs has contributed to an increase in volatility lately, and we will not be surprised if that continues in coming weeks. Despite the market losses, economic data was largely positive last week-- Retail sales grew more than expected in May, and applications for unemployment benefits fell.

For the week, the S&P lost 1%, the Dow slumped 1.17%, and the Nasdaq fell 1.32%.

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

Crossed Signals Over Fed's Stimulus Efforts

This week's Federal Reserve meeting is being even more highly anticipated than usual and the Washington Post describes a key reason why. The Fed's new communication strategy that was intended to provide more transparency into their thinking seems to have instead left investors confused by mixed messages. As a result, financial market volatility has increased in recent weeks as investors speculate when the Fed is likely to start reducing the amount of their monthly bond purchases.

Fed officials have pointed to "substantial improvement" in the job market as a key data point that will determine when the bond purchases will be adjusted, but have not provided a consistent set of criteria over how they will measure this improvement. As a result, it seems reasonable to expect that Fed Chairman Ben Bernanke will spend much of his news conference Wednesday following the Fed's two-day policy meeting attempting to provide a clearer message regarding when the Fed's asset purchases will be reduced. Needless to say, market participants will be watching closely.

U.S. Inflation Data Points to Firming Economy

This morning the U.S. Department of Labor reported that the consumer price index rose 0.1 percent last month, which follows two straight months of declines, while the core index, which excludes food and energy costs, rose 0.2 percent from last month and is now up 1.7 percent in the 12 months through May. As consumer spending has increased the trend has been slightly higher inflation, which provides support that the Fed may move closer to paring back its economic stimulus programs as soon as this fall.

Abenomics Races against the Clock

In a recent Bloomberg op-ed, Tokyo-based William Pesek discusses Abenomics, which is new Japanese Prime Minister Shinzo Abe's giant monetary and fiscal stimulus plan to pull Japan out of a deflationary funk. As Japanese markets soared through the middle of May, Abe and his plan received high ratings by the public.

However, the last month has seen a decrease in support for Abe. As the Japanese market has become more volatile, the public has begun to question Abenomics. Companies have not raised prices (as intended by the plan), and polls show the public is beginning to questing Abe's policies. While so many predicted this time was different such a short time ago, slowly it is looking like Abe's fate may be no different from the previous 10 Japanese prime ministers, which have each lasted an average of just over a year.

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

The View from the Top?

A few weeks ago, the S&P 500 closed at a record high of 1669, while most recently the index has given back some of these gains. Naturally, investors may be concerned with how fast the market has gone up in the last 6 months, not to mention dire headlines predicting that with our current fiscal situation the only fate of investment portfolios is to go lower. While people may feel great about this recent charge, it also can create a swirl of questions:

• After such a strong rally, and with the federal deficit so large, won’t market chaos emerge soon, sending equities and bonds into a downward spiral?
  
• Should we sell our assets to take profits while we still can? 

But, perhaps you should take a step back for a moment and think about how you should react with your portfolio with some different questions:

• Has your time horizon been altered?
  
• Have your liquidity needs changed? 

If you have the same time horizon and liquidity needs as you did when you established your financial plan, chances are you shouldn’t be thinking “what’s going to happen to stocks this summer,”—you should be thinking, “what’s going to happen to stocks over the next five to ten years?”

I can’t predict when the market will break through the all-time record high it set a few weeks ago, and I’ll put money on the fact that you can’t either. As a prudent financial professional, what I can do is help prepare for what we know is inevitable – the rise of interest rates.

Interest rates have been at historic lows for a while now. The Federal Reserve has kept rates near 0 percent in an effort to inject liquidity into our financial markets by buying Treasurys, and most recently by buying Mortgage Backed Securities. When the Federal Reserve purchases these bonds from banks, banks are flushed with cash, enabling them to loan to consumers, in turn consumers are able to make purchases on big ticket items such as cars or appliances. Increased consumption helps businesses as they sell more goods and their profits increase.

The Federal Reserve has accomplished this, for the most part. Markets have reached record highs, corporations have attained record profits, consumer sentiment has climbed, and household net worth recently hit record highs as well. Unemployment has dropped 2.5% to 7.6% over the last 3 years. The Federal Reserve’s objective is an unemployment rate target of 6.5%, and a 2% inflation rate. Although it may take another year or two to lower the unemployment rate to the Fed’s target, there is the real possibility that the Fed could begin to sell their bonds back into the market before the unemployment target is reached.

Currently there is nearly $4 trillion on the Fed’s balance sheet, and in order to normalize this, the Fed will have to sell back these bonds, which will effectively start to increase interest rates due to the increased supply in the market. Increasing interest rates would lower bond prices. This could be a bit painful for the market, but if the Federal Reserve waits longer, the deficit will grow larger, and the impact on the market could be worse. The Fed has to be very delicate as to how to sell back these bonds. The bottom line is that no matter what method they use to reduce their balance sheet, bonds will be hurt, but there will be certain bond and equity sectors that will hold up better than others.

Time will tell, but a review of any potential exposure you may have is important now.

Perspectives from Above the Noise – Week of June 10, 2013

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

U.S. stock indices were on track for a third straight weekly decline, until positive economic data sparked equity markets higher on Friday. International stocks had a bad week; the benchmark MSCI EAFE index dropped 1.14% as Asian equities took a beating. The Hong Kong stock market turned its worst weekly performance in more than a year as Chinese investors grappled with a cash squeeze and weak economic data.

For the week, the S&P 500 gained 0.78%, the Dow gained 0.88%, and the Nasdaq gained 0.39%.

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

Estimating the Trend in Employment Growth

The U.S. labor market has been adding about 175, 000 jobs per month over the past year, below the 200,000 plus some economists believe is needed to drive the unemployment rate meaningfully lower. However, a recent paper from the Chicago Federal Reserve suggests that the real level of job creation needed to keep up with population growth and other factors is closer to 80,000 per month.

Furthermore, the authors go on to argue that this number will decrease over time to the point that by 2016, the economy will only need to create 35,000 per month to keep up with population growth. If this analysis is correct, it would suggest that average monthly job growth of 175,000 is not only enough to cover the rising population, but it would also put downward pressure on the unemployment rate.

U.S. Expansion Poised for Longevity

The economic recovery following the 2008-09 recession has been sluggish relative to prior post-World War II recoveries, as the U.S economy has grown at a modest 2 percent annually over the last four years. The current recovery might lack in strength, but it may have more longevity than prior recoveries with no signs that the economy is overheating.

We are four years into the recovery and inflation remains subdued, household debt is declining, and the labor market is expanding. Based on these factors, Northwestern University economics professor Robert Gordon predicts economic expansion to continue for up to five additional years, which would result in the second longest post-WWII recovery, and double the average length of 58 months.

A Bloodless German Duel Over the ECB

A Bloomberg opinion piece by Megan Greene examines the potential outcomes of a ruling expected this week from Germany’s constitutional court that has important implications for the euro. The German court is meeting June 11-12 in order to determine the legality of a program of bond-buying by the European Central Bank (ECB) called outright monetary transactions. The prospect of outright monetary transactions by the ECB has helped calm sovereign debt fears in the region over the past six months and a rejection of the program by the German court could have a destabilizing impact.

However, the author argues that the most likely outcome is the German court will approve the ECB’s program but require further clarification and conditions that will limit Germany’s exposure. Such an outcome should be relatively non-eventful for global markets and may explain why investors have not been more worried about this important German court decision.

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

Perspectives from Above the Noise – Week of June 3, 2013

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

Markets rose early last week on a couple of lukewarm economic reports, which raised expectations that the Fed will be forced to continue to bolster the economy with its quantitative easing program. The last weekly jobless report for the month showed an increase in unemployment claims, meaning job growth looks to have been essentially flat over the last two months.

Markets ended the shortened trading week down, battered by selling pressure and volatility around possible Fed actions. For the week, the S&P 500 lost 1.14%, the Dow slid 1.23%, and the Nasdaq trimmed 0.09%.

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

'Underlying Bullish Story' for Stocks: Strategist

U.S. equities were able to record their strongest May performance since 2009, despite ending the month with the worst one day decline in nearly two months. U.S. equities have not had a correction this year and finished in positive territory each of the first five months this year.

Although a correction could be in store, Thomas Lee, JP Morgan's chief equity strategist, feels U.S. equities have more upside because the "underlying bullish story for stocks remains intact." He points out there is a shift in momentum from defensive stocks to cyclical stocks, continued strengthening in the housing sector and the wealth effect from rising stock and home prices is helping the American consumer.

April Case-Shiller Composite to Show Annual Appreciation Above 12%

A blog posting on the real estate site Zillow.com provides some interesting insight on the Case-Shiller Home Price Index, which Zillow has begun forecasting in advance (and fairly accurately so far) using their own housing data. The Zillow model expects that next month's Case-Shiller Index will show an eye-catching 12.1% year-over-year rise, which may provide further optimism regarding the housing market's strength.

However, Zillow also makes the important observation that the recent rate of appreciation in the Case-Shiller Index is being driven by a bias toward large, coastal cities currently seeing large price gains and by the inclusion of distressed sales, which are seeing very large year-over-year gains. As a result, the current magnitude of the gains in the Case-Shiller Index is likely to be fleeting and appear far more pedestrian by next year.

Auto Sales Continue to Be Economic Bright Spot

Record energy production coupled with a sustained housing recovery are pushing pickup sales to the highest level in as much as eight years and driving Detroit's comeback. This latest report is encouraging since pickup sales are often viewed as an indicator of the health of small business activity. Fueled by low-interest rate car loans, light-vehicle sales have picked up every month this year. An official at General Motors said that "if we use our sales as a barometer, it appears that the recovery is becoming even more broad-based".

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