Weekly Economic Update for the Week of May 31, 2010

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Weekly Economic Update for the Week of May 31, 2010

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Personal spending flat for April. However, wages rose 0.4% and disposable personal incomes went up 0.5% (the biggest increase in almost a year). April was the first month since September in which consumer spending didn’t increase.^1,2

Home sales rise. Federal tax credits expired in April, and these numbers reflect it: the Commerce Department said new home sales were up 14.8% for the month (they were also 47.8% above April 2009 levels). The National Association of Realtors noted a 7.6% gain in existing home sales in April.³

Sentiment indexes improve. The final University of Michigan/Reuters survey for May hit 73.6, up from a 72.2 reading in late April. The Conference Board’s consumer index hit 63.3, a level unseen since September 2008.⁴

Durable goods orders rise 2.9%. The Commerce Department report showed transportation orders behind the April gain, which topped the 1.3% increase forecast by economists.⁵

Hopefully, June will be better. The poorest month for equities since November 2008 finally ended. The DJIA closed May at 10,136.63. As for the NASDAQ and S&P 500, they stood respectively at 2,257.04 and 1,089.41 as the Memorial Day weekend began (Wall Street resumes trading on Tuesday). Even after the May selloff, the Russell 2000 was +5.79% on the year through the weekend.⁶

% Change	Y-T-D	1-Yr Chg	5-Yr Avg	10-Yr Avg
DJIA	-2.79	+20.62	-0.77	-0.37
NASDAQ	-0.53	+28.84	+1.75	-3.48
S&P 500	-2.30	+20.13	-1.82	-3.06
Real Yield	5/28	1 Yr Ago	5 Yrs Ago	10 Yrs Ago
10YrTIPS	1.32%	1.87%	1.67%	4.34%

(Source: CNBC.com, BigCharts.com, ustreas.gov, bls.gov, 5/28/10)^6,7,8,9

Indices are unmanaged, do not incur fees or expenses, and cannot be

invested into directly. These returns do not include dividends.

Citations.

1 - bea.gov/newsreleases/national/pi/pinewsrelease.htm [5/28/10]

2 - investmentadvisor.com/news/2010/5/Pages/Consumer-spending-flat-personal-income-rises-04-sentiment-inches-up.aspx [5/28/10]

3 - online.wsj.com/article/SB10001424052748704717004575268173355581314.html [5/28/10]

4 - thestreet.com/story/10769732/1/consumer-sentiment-holds-steady.html [5/28/10]

5 - forbes.com/2010/05/26/durable-goods-manufacturing-markets-economy-transportation.html [5/26/10]

6 - cnbc.com/id/37396837 [5/28/10]

7 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=DJIA&close_date=5%2F28%2F09&x=0&y=0 [5/28/10]

7 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=COMP&close_date=5%2F28%2F09&x=0&y=0 [5/28/10]

7 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=SPX&close_date=5%2F28%2F09&x=0&y=0 [5/28/10]

7 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=DJIA&close_date=5%2F27%2F05&x=0&y=0 [5/28/10]

7 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=COMP&close_date=5%2F27%2F05&x=0&y=0 [5/28/10]

7 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=SPX&close_date=5%2F27%2F05&x=0&y=0 [5/28/10]

7 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=DJIA&close_date=5%2F30%2F00&x=0&y=0 [5/28/10]

7 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=COMP&close_date=5%2F30%2F00&x=0&y=0 [5/28/10]

7 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=SPX&close_date=5%2F30%2F00&x=0&y=0 [5/28/10]

8 - ustreas.gov/offices/domestic-finance/debt-management/interest-rate/real_yield.shtml [5/28/10]

8 - ustreas.gov/offices/domestic-finance/debt-management/interest-rate/real_yield_historical.shtml [5/28/10]

9 - treasurydirect.gov/instit/annceresult/press/preanre/2000/ofm11200.pdf [1/12/00]

WHY PEOPLE WANT INDEPENDENT FINANCIAL ADVISORS

why people want independent financial advisors

A new perception has taken hold: “independent” is better.

Times have changed – and so have financial advisors. Today, people don’t want financial advice from a salesman. Instead, they want a relationship with a financial professional who is candid, trustworthy and thoroughly educated, who provides personalized financial consulting for each client.

That search often leads them to a fee-based or fee-only financial advisor or a Registered Investment Advisor.

A pleasant alternative to Wall Street. A paradigm shift is happening, and the traditional brokerage houses are lagging. While old-school “stock brokers” have gone the way of the wooly mammoth, you still have a sales-first mentality in place at big banks and Wall Street brokerages. If you’re employed by one of them, the mantra is simple: make a sale, earn a commission.

As they try to serve their clients, these “wirehouse” brokers regularly contend with sales quotas and the inherent potential for conflicts of interest. It wears on them: a 2010 survey revealed that only 15% were “very satisfied” at their firms, and another 20% wanted to leave within two years.¹

Given the tarnished reputations of so many giant banks and brokerages, it isn’t surprising that consumers are turning elsewhere for financial advice. Here are three popular destinations.

A fee-based financial advisor has structured his or her practice to promote earning income from fees instead of commissions. The emphasis is on advice. An independent, fee-based financial advisor also has freedom – freedom to choose the most appropriate products and services for your risk tolerance and investment goals. (More about that in a moment.)

Fee-only financial advisors earn no commissions at all. They derive 100% of their income from client fees - annual management fees or hourly or per-project consulting fees. With this compensation arrangement, you know that a fee-only advisor is available to help you address myriad issues in your financial life, not simply those that could lead to a commission.

A Registered Investment Advisor (RIA) usually works to manage the assets of high net worth investors. An RIA receives management fees and does not receive commissions. The management fees usually represent a percentage of the assets a client has invested. RIAs have to register with the Securities and Exchange Commission and any states in which they operate.² Individuals, couples, families and institutions with sizable wealth management concerns often turn toward RIAs.

Even as the market has struggled since the end of 2007, independent Registered Investment Advisors have gained a greater share of assets under management in the U.S.³

People need unbiased advice. That’s probably the #1 reason why people seek an independent financial advisor. They know that the advice they receive is not influenced by sales incentives or directives. There is often a candor to the discussion that may not always be present at a bank or a brokerage.

People want more investment choices. An independent financial advisor is free to offer investments from dozens, maybe hundreds of companies, rather the investments of a single company. In addition, that independent advisor can unhesitatingly tell you if an investment is or isn’t appropriate for your financial situation.

This is the age of independence. When it comes to the financial future, no one wants to be “sold” – just advised. That’s why we’ve seen the rise of a new kind of financial advisor who puts the client relationship first.

Citations

1 – bankinvestmentconsultant.com/news/pirker-aite-wirehouse-advisors-2667209-1.html [6/1/10]

2 – investopedia.com/articles/financialcareers/06/whatisaRIA.asp [6/11/10]

3 – fa-mag.com/fa-news/5548-independents-make-headway-despite-downturn.html [5/10/10]

Weekly Economic Update for the Week of May 24, 2010

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Weekly Economic Update for the Week of May 24, 2010

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Attention on Europe (and the Senate). The euro thankfully rose for three straight days last week, after hitting a four-year low after German chancellor Angela Merkel commented that the EU/IMF debt bailout had “done no more than buy time” to fix the crisis. Thursday evening, the Senate passed its version of the financial industry reform bill; the next step is reconciliation with the House version. Stocks were hit hard early in the week, but managed Friday gains; a late rally took the Dow north 125 points.^1,2,3

 

Consumer, producer prices retreat. This was surprising: the CPI declined 0.1% in April as energy prices fell by 1.4%. The PPI also decreased 0.1%. The Commerce Department reported a 0.9% year-over-year increase in the CPI, well below the Federal Reserve’s annual inflation target of 1.5-2.0%.^4,5

 

Indicators streak ends. The Conference Board’s index of leading indicators slipped 0.1% last month, the first dip since March 2009. Economists surveyed by Thomson Reuters had forecast a 0.2% increase.⁶

 

Housing starts rise, permits fall. Overall housing starts increased by 5.8% in April to the highest level since October 2008, with a 10.0% rise in single-family construction. However, the Commerce Department had building permits down by 11.5% - an effect of expiring federal tax credits.⁷

 

Bulls try to hold their ground. All three major U.S. indices slipped between 4-5% last week. However, the S&P rose 1.50% Friday to end the week at 1,087.69. At Friday’s close, the Dow was at 10,193.39 and the NASDAQ at 2,229.04.⁸

 

% Change	Y-T-D	1-Yr Chg	5-Yr Avg	10-Yr Avg
DJIA	-2.25	+22.93	-0.53	-0.33
NASDAQ	-1.77	+31.49	+1.78	-3.37
S&P 500	-2.46	+22.44	-1.71	-2.23
Real Yield	5/21	1 Yr Ago	5 Yrs Ago	10 Yrs Ago
10YrTIPS	1.33%	1.67%	1.67%	4.34%

(Source: CNBC.com, BigCharts.com, ustreas.gov, bls.gov, 5/21/10)^9,10,11,12

Indices are unmanaged, do not incur fees or expenses, and cannot be

 invested into directly. These returns do not include dividends.

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Citations.

1 - guardian.co.uk/business/2010/may/17/euro-four-year-low-debt-crisis [5/17/10]

2 - money.cnn.com/2010/05/21/markets/markets_newyork/index.htm [5/21/10]

3 - marketwatch.com/story/us-stocks-turn-positive-boosted-by-financials-2010-05-21 [5/21/10]

4 - blogs.barrons.com/stockstowatchtoday/2010/05/19/cpi-has-surprise-dip-led-by-energy-prices [5/19/10]

5 - online.wsj.com/article/SB10001424052748703691804575254091622651542.html [5/20/10]

6 - thenewstribune.com/2010/05/20/1194127/leading-indicators-drop-01-percent.html [5/20/10]

7 - investors.com/NewsAndAnalysis/Article.aspx?id=534355 [5/18/10]

8 - blogs.wsj.com/marketbeat/2010/05/21/data-points-us-markets-246/ [5/21/10]

9 – usatoday.com/money/default.htm [5/21/10]

10 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=DJIA&close_date=5%2F21%2F09&x=0&y=0 [5/21/10]

10 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=COMP&close_date=5%2F21%2F09&x=0&y=0 [5/21/10]

10 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=SPX&close_date=5%2F21%2F09&x=0&y=0 [5/21/10]

10 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=DJIA&close_date=5%2F20%2F05&x=0&y=0 [5/21/10]

10 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=COMP&close_date=5%2F20%2F05&x=0&y=0 [5/21/10]

10 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=SPX&close_date=5%2F20%2F05&x=0&y=0 [5/21/10]

10 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=DJIA&close_date=5%2F22%2F00&x=0&y=0 [5/21/10]

10 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=COMP&close_date=5%2F22%2F00&x=0&y=0 [5/21/10]

10 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=SPX&close_date=5%2F22%2F00&x=0&y=0 [5/21/10]

11 - ustreas.gov/offices/domestic-finance/debt-management/interest-rate/real_yield.shtml [5/21/10]

11 - ustreas.gov/offices/domestic-finance/debt-management/interest-rate/real_yield_historical.shtml [5/21/10]

12 - treasurydirect.gov/instit/annceresult/press/preanre/2000/ofm11200.pdf [1/12/00]

THE 2 BIGGEST RETIREMENT MISCONCEPTIONS

THE 2 Biggest retirement misconceptions

While the idea of retirement has changed, certain financial assumptions haven’t.

We’ve all heard about the “new retirement”, the mix of work and play that many of us assume we will have in our lives one day. We do not expect “retirement” to be all leisure. While this is becoming a cultural assumption among baby boomers, it is interesting to see that certain financial assumptions haven’t really changed with the times.

In particular, there are two financial misconceptions that baby boomers can fall prey to – assumptions that could prove financially harmful for their future.

#1) Assuming retirement will last 10-15 years. Historically, retirement has lasted about 10-15 years for most Americans. The key word here is “historically”. When Social Security was created in 1933, the average American could anticipate living to age 61. By 2005, life expectancy for the average American had increased to 78.¹

However, some of us may live much longer. The population of centenarians in the U.S. is growing rapidly – the Census Bureau estimated 71,000 of them in 2005 and projects 114,000 for 2010 and 241,000 in 2020. It also believes that 7.3 million Americans will be 85 or older in 2020, up from 5.1 million 15 years earlier.²

If you’re reading this article, chances are you might be wealthy or at least “affluent”. And if you are, you likely have good health insurance and access to excellent health care. You may be poised to live longer because of these two factors. Given the landmark health care reforms of the Obama administration, we could see another boost in overall American longevity in the generation ahead.

Here’s the bottom line: every year, the possibility is increasing that your retirement could last 20 or 30 years … or longer. So assuming you’ll only need 10 or 15 years worth of retirement money could be a big mistake.

In 2010, the American Academy of Actuaries says that the average 65-year-old American male can expect to live to 84½, with a 30% chance of living past 90. The average 65-year-old American female has an average life expectancy of 87, with a 40% chance of living past 90.³

Most people don’t realize how much retirement money they may need. There is a relationship between Misconception #1 and Misconception #2 …

#2) Assuming too little risk. Our appetite for risk declines as we get older, and rightfully so. Yet there may be a danger in becoming too risk-averse.

Holding onto your retirement money is certainly important; so is your retirement income and quality of life. There are three financial issues that can affect your quality of life and/or income over time: taxes, health care costs and inflation.

Will the minimal inflation we’ve seen at the start of the 2010s continue for years to come? Don’t count on it. Over the last few decades, we have had moderate inflation (and sometimes worse, think 1980). What happens is that over time, even 3-4% inflation gradually saps your purchasing power. Your dollar buys less and less.

Here’s a hypothetical challenge for you: for the rest of this year, you have to live on the income you earned in 1999. Could you manage that?

This is an extreme example, but that’s what can happen if your income doesn’t keep up with inflation – essentially, you end up living on yesterday’s money.

Taxes will likely be higher in the coming decade. So tax reduction and tax-advantaged investing have taken on even more importance whether you are 20, 40 or 60. Health care costs are climbing – we need to be prepared financially for the cost of acute, chronic and long-term care.

As you retire, you may assume that an extremely conservative approach to investing is mandatory. But given how long we may live - and how long retirement may last - growth investing is extremely important.

No one wants the “Rip Van Winkle” experience in retirement. No one should “wake up” 20 years from now only to find that the comfort of yesterday is gone. Retirees who retreat from growth investing may risk having this experience.

How are you envisioning retirement right now? Has your vision of retirement changed? Is retiring becoming more and more of a priority? Are you retired and looking to improve your finances? Regardless of where you’re at, it is vital to avoid the common misconceptions and proceed with clarity.

Citations

1 – nytimes.com/2008/04/27/weekinreview/27sack.html?pagewanted=print [4/27/08]

2 – usatoday.com/tech/science/2005-10-23-aging-centenarians_x.htm [10/23/05]

3 – usatoday.com/money/perfi/retirement/2010-04-30-401k28_CV_N.htm [5/3/10]

THE FINANCIAL REFORM BILL

THE FINANCIAL REFORM BILL

 

Main Street’s anger over Wall Street reaches the Senate floor.

 

Another reform bill is now making its way through the Senate – a bill that would reregulate the financial services industry with a few goals in mind:

1)    Preventing failures of large banks and financial services firms, or at least insulating taxpayers and the economy in such an emergency

2)    Creating a new financial watchdog agency to protect consumers

3)    Tightening regulations on derivatives

4)    Banning banks from proprietary trading (with the “Volcker Rule”)

5)    Increasing transparency^1,2,3

Anger on Main Street, while palpable, won’t pass these reforms. In the Senate, Democrats are largely driving them; Republicans want to see them altered. Let’s look at them briefly.

The bailout issue. The bill introduced by Senate Banking Committee Chairman Chris Dodd (D-CT) would set up an “orderly liquidation fund” - $50 billion deep – to help the federal government wind down any big banks that threaten to go belly up.³ Senate Republicans argue that this would amount to a permanent “bailout fund” that would implicitly encourage federal bank rescues. Some Republicans think it perpetuates the “too big to fail” mentality.

A group of Congressional Democrats have introduced the S.A.F.E. Banking Act, which would cap bank size: no U.S. bank or bank holding company could hold more than 10% of the country’s insured deposits. The S.A.F.E. Act would also hold the amount of non-deposit liabilities at financial institutions at 2% of GDP for banks, and set a 6% leverage limit for bank holding companies.⁴

The proposed new Bureau. The reform bill proposes creating a Bureau of Consumer Financial Protection, possibly as an offshoot of the Federal Reserve. It would watch over banks and credit unions with $10 billion or more in assets, as well as major investment firms and mortgage lenders apart from the banking industry. In addition to trying to protect people from predatory or discriminatory practices, the BCFP would also seek to better inform consumers via an Office of Financial Literacy.² Skeptics see this as another multibillion-dollar layer of bureaucracy, a “fifth wheel” whose mission could just as well be handled by an augmented Fed.

Crackdowns on derivatives & proprietary trading. Ah yes, derivatives – those investments no one really understood. Or watched closely. The reform bill would require banks to build a wall between their derivatives trading and their commercial banking operations – in other words, the “Volcker Rule” would be the law. Well, banks do make a lot of money through proprietary trading in their own accounts. In late April, JP Morgan analysts concluded that if the Volcker Rule went into effect, the six biggest global investment banks would need $85 billion more to capitalize the new investment banking divisions they would need to create. According to the JPMorgan scenario, Deutsche Bank would have to grab $26 billion alone and BNP Paribas would have to come up with $21.1 billion.⁵

A better understanding for all? If the reforms become law, regulators would work to make the “fine print” that comes with a credit card, a mutual fund or a mortgage product clearer, so that fees and other quietly assessed charges would become easier to understand. Hedge funds would have to register with the federal government. Certain Democrat-driven amendments would even demand more transparency at the Federal Reserve. As Sen. Bernard Sanders [I-VT] remarked in late April, “During the bailout, the Fed lent trillions of dollars at zero or near-zero interest rates to large financial institutions. During the Budget Committee hearing, I asked Chairman Bernanke who received that money, [and] he refused to tell us."

A new chapter, or a whole new book? You could argue – convincingly - that a loosely regulated Wall Street caused or least exacerbated the “Great Recession”. In the aftermath of that downturn, we may see the biggest rewrite of financial rules and regulations since the Great Depression coming before 2010 ends.

 

 

Citations

1 – msnbc.msn.com/id/36770907/ns/business-us_business/ [4/27/10]

2 – csmonitor.com/USA/Politics/2010/0429/Financial-reform-bill-101-what-it-means-for-consumers [4/29/10]

3 – csmonitor.com/USA/Politics/2010/0428/Financial-reform-four-sticking-points [4/28/10]

4 – memphisdailynews.com/editorial/Article.aspx?id=49660 [4/29/10]

5- reuters.com/article/idUSN2924718120100429 [4/29/10]

6 - csmonitor.com/USA/Politics/2010/0428/Republicans-relent-clear-financial-reform-bill-for-debate/%28page%29/2 [4/28/10]

 

Weekly Economic Update for the Week of May 17, 2010

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Weekly Economic Update for the Week of May 17, 2010

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Gold soars, euro slips, rumors plague EU.

Wall Street watched Europe closely last week; investors initially loved the almost-trillion-dollar debt rescue plan from the International Monetary Fund and the European Union, but then wondered if its austerity measures would slow growth. The euro hit an 18-month low Friday as rumors floated that certain EU nations might ditch the currency. Gold, meanwhile, settled at $1,227.80 an ounce Friday – prices are up about 16% since early February.^1,2

Retail sales up 0.4% in April.

"Georgia","serif""> This marks seven consecutive months of gains. Additionally, the Census Bureau said April 2010 retail sales figures were 8.8% improved from April 2009.³

Reuters: a gain in consumer sentiment. In May’s preliminary Reuters/University of Michigan poll, the index read 73.3, better than April’s 72.2. The survey’s one-year inflation expectations index read 3.1%, the highest mark in 11 months.⁴

Industrial output on the rise. On Friday, the Federal Reserve noted a 0.8% gain in industrial production for April. This follows up a 0.2% advance recorded in March.³

Up, down … up, down … and finally, up. Big swings ruled the market last week – but make no mistake, it was a winning week for equities. At the Friday close, the Dow stood at 10,620.16 after a 2.31% advance across five trading days. Last week, the NASDAQ rose 3.58% while the S&P 500 gained 2.23%. The Russell 2000 gained 6.28% last week.⁵

% Change	Y-T-D	1-Yr Chg	5-Yr Avg	10-Yr Avg
DJIA	+1.84	+27.47	+0.95	-0.17
NASDAQ	+3.42	+38.93	+3.74	-3.49
S&P 500	+1.85	+27.17	-0.32	-2.18
Real Yield	5/14	1 Yr Ago	5 Yrs Ago	10 Yrs Ago
10YrTIPS	1.26%	1.68%	1.66%	4.34%

(Source: CNBC.com, BigCharts.com, ustreas.gov, bls.gov, 5/14/10)^5,6,7,8

Indices are unmanaged, do not incur fees or expenses, and cannot be

invested into directly. These returns do not include dividends.

Citations.

1 - nytimes.com/2010/05/15/business/15markets.html?src=me [5/14/10]

2 - online.wsj.com/article/BT-CO-20100514-713372.html?mod=WSJ_latestheadlines [5/14/10]

3 -

font-family:"Georgia","serif"">npr.org/blogs/thetwo-way/2010/05/retail_sales_rose_04_last_mont.html [5/14/10]

4 - cnbc.com/id/37148851/ [5/14/10]

5 - cnbc.com/id/37155847 [5/14/10]

6 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=DJIA&close_date=5%2F14%2F09&x=0&y=0 [5/14/10]

6 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=COMP&close_date=5%2F14%2F09&x=0&y=0 [5/14/10]

6 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=SPX&close_date=5%2F14%2F09&x=0&y=0 [5/14/10]

6 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=DJIA&close_date=5%2F13%2F05&x=0&y=0 [5/14/10]

6 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=COMP&close_date=5%2F13%2F05&x=0&y=0 [5/14/10]

6 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=SPX&close_date=5%2F13%2F05&x=0&y=0 [5/14/10]

6 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=DJIA&close_date=5%2F15%2F00&x=0&y=0 [5/14/10]

6 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=COMP&close_date=5%2F15%2F00&x=0&y=0 [5/14/10]

6 - bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=SPX&close_date=5%2F15%2F00&x=0&y=0 [5/14/10]

7 - ustreas.gov/offices/domestic-finance/debt-management/interest-rate/real_yield.shtml [5/14/10]

7 - ustreas.gov/offices/domestic-finance/debt-management/interest-rate/real_yield_historical.shtml [5/14/10]

8 - treasurydirect.gov/instit/annceresult/press/preanre/2000/ofm11200.pdf [1/12/00]