Special Perspective: The Changing Price of Oil – Monday, December 22, 2014

Crude oil has plunged nearly 50% to $55 per barrel, from June of this year, amid a widening glut

caused by U.S. shale production. OPEC balked at cutting supplies to shore up prices at its late-November meeting and recent activity suggests it intends to stand by its decision, even if prices fall as low as $40 per barrel. They intend to wait at least three months before considering an emergency meeting. The minister of energy from the United Arab Emirates, said "we're not targeting a price; the market will stabilize itself."

Here are 4 charts (and some brief comments) that help to provide some perspective on the global issues surrounding the drop in oil prices.

 The declining price of oil has wreaked havoc on global investment markets—while consumer confidence has been the benefactor. It seems evident that the drop in price is largely due to 2 factors as explained in these 2 successive charts.

Global supply has been buoyed by a significant increase in US oil production over the past 5 years. US shale drilling projects have increased 47.5% from 2008.

The supply/demand curve for oil will certainly be affected a potential drop in consumption. Future oil demand will likely decrease with a proliferation of alternative and/or renewable energy sources. There is a question as to whether or not cheap oil will make other energy sources less appealing.

The last chart perhaps is most illustrative of the affect of oil prices on resource-driven economies. Russia’s economy has already taken a big hit, and other emerging economies could follow.

The drop in oil prices has caused volatility on investment markets, and I would expect that to
continue. This could potentially slow the Federal Reserve’s move to raise rates in 2015. Though oil is only part of the economic jigsaw, it is a LARGE piece of the puzzle.



Sources: Energy Information Administration; BP Statistical Review of World Energy; Business Insider, Deutsche Bank Research, Wall Street Journal, Citibank Researc

8 Wealth Issues: Fiscal Fitness

A Look at Baseline Financial Health Ratios

In this month’s 8 Wealth Issues blog, I thought I would address the concept of what our practice refers to as “Fiscal Fitness.” New clients to our practice sometimes do not understand what I am referring to, but this is the foundation for sound financial planning. This involves capturing an accurate picture of your current financial condition—documenting what all of your assets are worth, less any liabilities; as well as building a cash-flow model that is true to your income and spending habits.

Fiscal fitness goes beyond this as well. It includes being organized with financial documents, and managing your wealth so that you can feel confident making future financial decisions. Often helping clients make financial decisions comes in “stress-testing” the impact of those decisions within your current financial plan.

Baseline financial health, however, can be brought back to 4 ratios. These are:

Monthly Surplus/Monthly Income

After you pay all of your monthly obligations, how much money do you have left? This is your monthly surplus and if you divide this amount by your total monthly income, you’ll get an idea of how well you manage your finances and also, an ideal percentage of that income you can put away for savings. When calculating your monthly obligations, be sure to include everything — all of your bills, credit card bills, your house payment, groceries, and even your magazine subscriptions.

It is important to note that you should add back in any 401k contributions into your monthly income, as this is periodic savings mechanism and that is exactly the ratio we are looking to measure here. This ratio can identify whether or not you could be putting more toward tax advantaged retirement savings.

Cash and Liquid Assets/Monthly Expenses

For this ratio, you want to add in all of your cash assets, like cash on hand, cash in the bank, money market account balances, and money you have in CDs (do not include cash in retirement accounts). If you divide that total by the total amount of all of your monthly expenses, you’ll get an idea of how long you can sustain your household in the event of an emergency situation, like illness or job loss. For self employed people or single income households, this can be a crucial ratio to be mindful of.

Of all the items I look at when assessing a clients Fiscal Fitness, it is the presence of an adequate emergency fund that is most often missing. Not having this ratio in good health could cause you to have to invade retirement savings in the event of loss of income—which in turn may cause tax headaches and penalties.

Cash and Liquid Assets/Net Worth

Your net worth is the difference between your assets and your debt. To calculate your net worth, add up the value of all of your assets. This includes everything, ranging from the value of your home, to the estimated value of your furniture, to all of your cash and cash assets. Subtract your debts (your credit card balances, mortgage, etc.) from this amount. There are also some online net worth calculators you can use to walk you through the process.

Once you’ve determine your net worth, divide your net worth by all of your cash and liquid assets (your bank account balances, CDs, money market accounts, etc.). This will give you the percentage portion of your net worth that is held in liquid form. Too high of a ratio means you could have too much cash at hand and therefore your money is likely not working for you adequately. Conversely, a common mistake I see is people reaching for growth by putting short term money in risk-based investments. Be mindful of time horizon.

Monthly Debt/Monthly Income

This is your debt to income ratio and it helps determine how much of a lending risk you are. Banks use this ratio as a baseline for determining loan approvals & mortgages. The lower your debt-to-income ratio, the better chance you have of receiving credit from lenders in most cases. Ideally, 36 percent is the highest debt-to-income percentage you should have. You can calculate this ratio on your own by dividing your total monthly debt (credit card payments, student loans, mortgage payment, etc.) by your monthly income.

These ratios can help you set a good baseline for financial health and making sound financial decisions. Please be sure to contact our practice if you would like help in looking at all the aspects of Fiscal Fitness or any of the other 8 Wealth Issues we help with tackling. The beginning of a new year is a great time to turn over a new financial leaf.

Happy Holidays.

Citations.
Personal Finance Cheat Sheet – “How Financially Healthy Are You? Find Out Using 4 Ratios”

This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Perspectives from Above the Noise – Week of December 15, 2014

Last week was volatile for global equities, ending with the Dow Jones Industrial Average falling 315 points on Friday to bring its weekly loss to 3.8%. This was the worst weekly loss for the Dow on a percentage basis since September of 2011 and was driven by a continued meltdown in the energy sector. Fears of a sharp global slowdown continue to be fed by the steep drop in oil prices, which many investors believe is at least in part attributable to a weakening economic outlook.

However, some positive domestic data came from Thursday’s retail sales data, which indicated that the plunge in oil prices over the past three months is generating a boost to consumer spending heading into the holiday shopping season. Retail sales (minus gasoline) surged 6% in November on a year-over-year basis, the most in nearly three years.

For the week, the S&P 500 dropped -3.52%, the Dow Jones Industrial Average fell -3.78%, and the MSCI EAFE (developed international) lost -3.54%.

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

Why Russia's Monster Rate Hike Spells Trouble Ahead

Early Tuesday, the Central Bank of Russia (CBR) hiked its key interest rate by 650 basis points to 17%, the sixth rate increase this year. The impact was immediately reflected in the Russian ruble which plunged about 12%, bringing its loss against the dollar to nearly 50% this year.

The rate hike and falling currency will further threaten financial stability in the troubled economy which has faced the double whammy of collapsing oil prices and the specter of new U.S. sanctions. Ordinary Russians are feeling the squeeze as consumer price inflation is forecast to reach 10% by the end of the year.

Similarities and Differences Between Now and 1998 Emerging-Market Crisis

In recent weeks, there has been a flight of foreign capital fleeing emerging markets creating fears of a full-blown currency crisis and a resulting financial market contagion similar to what happened in 1998. A recent Bloomberg article provides a nice summary of the similarities and differences between now and 1998. Despite some concerning similarities, the article details a few important differences which suggests the odds favor a somewhat less severe outcome than the 1998 experience.

These key differences include many emerging countries holding much larger foreign reserves than in the 1990's, as well as now issuing most debt in local currency rather than U.S. dollars. These changes should increase the odds that most countries will weather the current currency volatility and capital outflows, without experiencing a crisis on the scale of 1998.

One Hundred Years of Bond History Means Bears Destined to Lose

A Bloomberg article offers some longer-term perspective on bond yields suggesting the era of high inflation and interest rates that occurred in the 1970's and 1980's was an aberration. With the longest-dated U.S. Treasury bonds now yielding less than half the 6.8% average over the past five decades, it’s not hard to see why forecasters say they're bound to rise as the Federal Reserve prepares to raise interest rates following the most aggressive stimulus measures in its 100-year history. Yet, compared with levels that prevailed in the half-century before that, yields are in line with the norm.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.

International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.

Perspectives from Above the Noise – Week of December 8, 2014

Contrasting several recent data points that provided evidence of slowing domestic growth, the past week included a couple of important economic releases that indicated U.S. economic momentum remained solid in November. Wednesday’s release of the ISM Non-manufacturing Index for November showed an improvement to 59.3, the second-highest level since August 2005 and well ahead of consensus expectations. 

Globally, the focus was on the European Central Bank’s (ECB) latest meeting on Thursday, when it substantially lowered its forecasts for both inflation and growth. ECB President Mario Draghi seemed to, at least initially, disappoint investors by failing to commit to additional stimulus measures to offset those drags, explaining in rather vague terms that officials are still evaluating whether the ECB is already doing enough. Needless to say, European equity markets reversed lower and the euro currency rallied sharply in the wake of his comments.

For the week, the S&P 500 rose +0.38%, the Dow Jones Industrial Average added +0.73%, and the MSCI EAFE (developed international) dropped -0.40%.  Here are the 3 stories this week that rose above the noise:

Economists See Revved-Up U.S. Economy Next Year   

U.S. economic growth is expected to increase from 2.2 percent this year to 3.1 percent in 2015, according to the latest forecast from the National Association for Business Economics (NABE). The economists surveyed also expect the unemployment rate to drop to 5.4 percent, but anticipate that inflation will remain low.

They were not as optimistic about global growth in 2015 and nearly half of the economists surveyed feel that foreign developed economies will experience slower growth for an extended period of time. According to the survey, the economists anticipate that Europe and Japan will experience GDP growth of around 1 percent in 2015.

Dollar Surge Endangers Global Debt Edifice, Warns BIS   

As summarized in a recent article, the Bank for International Settlements recently identified a growing risk to global financial stability triggered by the strengthening U.S. dollar. Many companies in emerging markets expanded their issuance of U.S. dollar-denominated debt over the past decade in response to general dollar weakness. 

However, as the U.S. dollar rises in value the debt burden of companies in emerging markets which have issued dollar-denominated debt will also rise, potentially straining global credit markets and creating financial market volatility. This is one risk worth watching closely in 2015.

US Manufacturers Still Outpacing Rest of World  

U.S. manufacturers barely slowed down in November even as major competitors around the world continued to scale back production. The Institute for Supply Management said its U.S. manufacturing index edged down to 58.7% last month from 59% in October. Yet any number above 50% signals expansion, and the latest reading kept the ISM index near a three-year high. Fourteen of the 18 industries tracked by ISM said business increased in November while the closely watched new orders component hit a three-month high.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer. 

International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.

Perspectives from Above the Noise – Week of December 1, 2014

In last week’s holiday-shortened schedule, economic data was highlighted by Wednesday’s initial jobless claims and durable goods orders. Weekly initial jobless claims rose 21,000 to the highest level since September. However, the four-week average of claims remained below 300,000 for the eleventh straight week. This week’s claims data also included the continuing claims figure that will be used to calculate the unemployment rate for November and showed 71,000 fewer continuing claims than last month, suggesting the headline unemployment rate could fall further when reported this Friday.

Last week’s trading was notable for a sharp plunge in oil prices following OPEC’s surprise decision to maintain output despite falling prices and excessive global supplies. The weakness in oil, which has pushed West Texas Intermediate crude near its lowest level since July 2009, has been exacerbated by signs of slowing global growth. The S&P GSCI Crude Oil commodity index is down more than 32% year to date.

For the week, the S&P 500 rose +0.20%, the Dow Jones Industrial Average added +0.10%, and the MSCI EAFE (developed international) increased +0.48%.

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

Black Friday Fatigue? Thanksgiving Weekend Sales Slide 11%

Spending over the four-day Thanksgiving weekend declined by an estimated 11% compared to last year, according to the National Retail Federation. Many analysts predicted strong growth in Black Friday sales this year because of rising consumer confidence and labor growth, falling energy costs, and the increase in retailers open on Thanksgiving. But it’s still possible for overall holiday season spending to increase compared to 2013.

Consumers might not be as enticed by Black Friday bargains as in years past because retailers now provide deep discounts on prices throughout the entire holiday season and also provide special online discounts.

Lower Gas Prices: How Big a Boost for the Economy?

A blog posting from The Wall Street Journal provides a nice summary of what impact lower oil prices are likely to have on the U.S. economy. The benefits that most businesses and consumers receive from falling energy prices are partially offset by headwinds potentially created from reduced investments by the domestic energy industry. However, as the energy industry still represents a relatively small percentage of employment, the net impact of lower oil prices is likely to be a 0.2 to 0.3 boost to economic growth in 2015 if the price of oil remains near current levels.

US Manufacturers Still Outpacing Rest of World

U.S. manufacturers barely slowed down in November even as major competitors around the world continued to scale back production. The Institute for Supply Management said its U.S. manufacturing index edged down to 58.7% last month from 59% in October. Yet any number above 50% signals expansion, and the latest reading kept the ISM index near a three-year high. Fourteen of the 18 industries tracked by ISM said business increased in November while the closely watched new orders component hit a three-month high.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.

International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification