Swimming with the Dolphins

I am back from vacation and had a great time swimming with the dolphins. Nikki loved her time with the dolphin in the picture above. We also saw a live alligator on the golf course; along with snakes, wild turkeys, herons, cranes and wonderful marsh birds. That makes for very exciting golf!

Market Rollercoaster in March

March is always an exciting month. Either the market soars to new highs (2000) or drops to new lows (2002); it never seems to be predictable. What is predictable is the continued demand for oil. The cost of oil continues to climb, touching $58 a barrel and then dropping back to $54.00. I believe the cost of oil will remain high for some time and do not envision the price back in the range of $30 per barrel this year.

If you want to succeed, you must make your own opportunities as you go.
~John B. Gough~


The Economy

Tips from Alan Greenspan: He believes the economy delivered a solid performance in 2004. So far in 2005 �activity appears to be expanding at a reasonably good pace.� I recently met with chief economists of two different mutual fund families. They each see the economy continuing to grow in 2005, and much of the expansion is coming from the business sector. The spending consumer has carried us for the last few years and now businesses are starting to expand, hire more staff and increase productivity.

The yield curve continues to flatten. The spreads between AAA corporate bonds and BBB corporate bonds have also dramatically narrowed over the past year. In a recovering economy, a company�s underlying fundamentals strengthen, thus resulting in increased earnings. This strengthening in company fundamentals generally increases credit quality. As credit quality strengthens, prices usually raise causing spreads to narrow. As the economy loses strength, a company�s fundamentals decline, thus lowering price and widening the spread.

Interest rates

On March 22, 2005, the Federal Reserve board raised the Fed Funds rate another � point to 2.75%. The increase in the federal funds rate marked the seventh time the Fed has pushed rates higher since it started its current credit tightening campaign in June 2004. At that time, the funds rate stood at a 46-year low of 1 percent.

I feel like Chicken Little. I have been saying that as interest rates rise, bond prices will fall. So far, the Fed has increased rates seven times and long-term bond prices have not fallen. What is going on? Alan Greenspan also expressed puzzlement over why long term interest rates, such as mortgage rates, have not been rising in conjunction with the Fed�s seven hikes of short-term rates. He stated two weeks ago that the mystery as become �less of a conundrum� because long-term rates have been rising in recent weeks. I don�t feel so bad if he is confused over it too! 30-year mortgage rates, currently near 6 percent, could be at 6.75 percent by year's end.

Greenspan began his shift from short-term interest rates to longer-term interest rates with comments in prepared testimony before Congress beginning Feb. 16. In reference to the puzzling decline in long-term rates amid consistent Fed rate increases, Greenspan termed it a "conundrum" and postulated it may be a "short-term aberration." While he included the comments as part of the official record, he did not speak of them. However, all of his comments are evaluated and his message was delivered. Rates on the 30 year mortgage moved from an average of 5.59 to just under 6%.

There are no secrets to success. It is the result of preparation, hard work, and from learning from failure.
~Colin L. Powell~

Social Security

The amount of income that FICA is currently taxed on is $92,000. The FICA tax is 6.2%. When it was proposed that the limit be removed, thus taxing all income earned, I was in favor of that proposal. If the level of taxed income rises, so does the maximum benefit paid by Social Security to the higher earners, though it rises less steeply. Even though that may mean my clients may have to pay a bigger share of taxes, I felt that was fair.

What I did not stop to consider was that it is the higher wage earners that are also saving the most money. They are ones that are able to contribute the maximum to their retirement programs such as a 401k or SEP IRA. They also make IRA contributions in addition to the retirement plans. They are the savers that our country needs to keep.

When the Clinton tax increase was heavily weighted toward the higher-income brackets, the results were reviewed afterward. What they found was that the very-high-income earners didn�t change their lifestyles significantly to pay the increased taxes; instead, they reduced their saving.

This could be very damaging since our nation is already desperately low in individual savings. It has been said it could damage the economy�s growth rate that would hamper, rather than help, the nation�s ability to fund the retirement of the baby boom generation.

I believe it will take several different solutions to fix our social security problem and perhaps an increased FICA limit is part of it. We need to find the happy medium where the high-income wage earners can pay more tax, still keep the same level of saving and continue to spend like the dependable consumers they are.

There is talk of letting the normal retirement age rise to 70. It is already scheduled to increase to 66 in 2011 and to age 67 in 2027. I believe, as they say, that dog won�t hunt. Some workers can not physically continue to work to age 70, yet they are not qualified to be �disabled�.

My health is good; it�s my age that is bad. ~Roy Acuff~


Supreme Court ruling

On April 5, 2005, the Supreme Court ruled that assets held in an individual retirement account (IRA) are not savings that can be attached by creditors in bankruptcy proceedings. This had always been a state issue and the State of California did not give creditor protection to IRA accounts. This is very good news. This adds protection to an IRA account that makes it equal to a qualified retirement plan. In the past, if a client was at risk for litigation being filed against them, assets in an IRA could have been used to pay for an award of damages. Their 401k account or a defined benefit plan could not be used as an asset. An example would be a doctor with a large malpractice suit and settlement against them. If the judgment award was larger than the insurance coverage for damages, the plaintiff could attach other assets, such as an IRA. Now, the IRA is protected and can not be attached.

Sandra C. Field, CSA, MBA, CFP