API 1st Quarter Update 2005

  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

API 4th Quarter Update 2004

The Good News�

USC played for the BCS title at the Fed Ex Orange Bowl game. After 22 straight wins and two back to back National Titles, the USC football team is the undisputed Champion. Quarterback Matt Lienart, Heisman winner, and the offensive line was awesome and our defense was dominating over the Oklahoma Sooners in a crushing 55 to 19 win. I am an avid football fan so this will was a great end to the season. Note the BCS title game will be held at the Rose Bowl in 2006. Now, if only my Minnesota Vikings could pull it together in the playoffs.

More good news: Joanne Liu, our paraplanner and research analyst is pregnant! She is due in July with her first child. We wish her an easy pregnancy and the office hopes she has a girl.

Investment review: 2004 was a good year!
After a difficult summer, both large and small-cap companies rallied impressively in 2004�s fourth quarter. For the quarter, the S&P 500 was up 9.2% versus gains of 14.1% for the Russell 2000 and 14.7% for the Nasdaq Composite.

Despite underperforming in the more difficult second and third quarters, small-caps significantly outperformed their large-cap counterparts for the full year. In 2004, the Russell 2000 was up 18.3% versus gains of 10.9% for the S&P 500 and 8.6% for the Nasdaq Composite. As I have said, you can never tell where the �party� will be between small cap and large cap, value verses growth. Diversification plays a key part in every portfolio.

There is almost always something to fear-recessions, inflation, deflation, political instability, and so on. We have found we have no ability to add value by incorporating these fears into our investment process. Instead, we use a time horizon that is long enough that such issues fade in importance. Bill Nygren, Oakmark Funds portfolio manager.

IRA and retirement contribution limits increase
You may now contribute $4,000 to your IRA for tax year 2005, those over 50 can add a catch up of $500. The annual contribution for 401k, 403b, SEP, 457 plans is $14,000 with a catch up of $4,000. Simple plans can contribute $10,000 with a $2,000 catch up.

Long Term Care Insurance tax deductions
Under new 2005 limits, policyholders between age 50 and 60 can deduct $1,020; those between age 60 to 70 can deduct $2,720 and those older than 70 can deduct $3,400. This is still subject to itemizing your medical expenses and 7.5% of your AGI. Check with your CPA for clarification if you pay LTC premiums.
Credit Report for free

You can now obtain an annual credit report for free. www.annualcreditreport.com. The toll free phone is (877) 322-8228. Do not respond to e-mail requests for personal information purporting to be from reporting companies- it�s a scam. Citibank and Washington Mutual also have been hit by scam emails asking customers to click on a link to verify their personal information. The emails carry the Citibank and Wa Mu logos and look authentic. Beware.

The Bad News�
The Tsunami
The thing about national disasters is the feeling of helplessness it brings. I watch TV and witness the devastation with horror. I want to help people and comfort those who have lost family members and feel helpless. I can only send money and hope it is applied to those in need, in the best way they see fit.

If you wish to help the victims of this horrific disaster, here are a few web sites that will aid the victims in Asia. Red Cross:www.redcross.org Doctors Without Borders/Medecins Sans Frontieres (I have been involved with this group for years) www.doctorswithoutborders.org U.S. Fund for UNICEF (helping the children) www.unicefusa.org Another useful site is www.USAfreedomCorps.gov Here you will find information on over 70 different organizations that can help the victims. Try to give checks, not cash, and do not give to telemarketers since their administrative cost is the highest.

The Deficit and the Dollar
A growing number of economists are asking how much longer the U.S. can rely on Asian central banks to finance the federal budget deficit. China, Japan and other Asian nations have amassed $2.2 trillion in foreign reserves with the majority in our treasuries. China has been buying more euros, pounds and yen than dollars lately, which may contribute to the rise in the euro and the further fall of the U.S. dollar. The greater the budget deficit, the more the U.S. has to borrow to fund the federal machine. More borrowing increases the supply of Treasury bonds and more bonds on the market results in further devaluation of our dollar.

A partial answer? Reduce the fiscal deficit and increase savings by Americans. Look for more incentives to save on a tax deferred basis coming from the Bush administration. You will begin to hear about the Lifetime Savings accounts (LSA) and Retirement Savings Accounts (RSA) he proposed four years ago.

Happiness is wanting what you have and not wanting what you don�t have. ~Shakyamuni Budda,500 BC~

Social Security Reform
It will be interesting to watch the push for partial privatization of Social Security. I am personally against the formation of private accounts to allow individuals to invest their social security accounts. I am fearful of the future when individuals make the wrong investment choices and diminish their account balances. The system needs reform but I am not sure this is the correct answer.

The maximum annual earnings subject to Social Security tax will be $90,000 in 2005. Earnings required for a quarter of coverage will increase to $920. Those retired under full retirement age can earn $12,000 per year without giving up earnings and for those that reach your full retirement age, you can earn $31,800 in 2005. Current beneficiaries will receive a 2.7% cost-of-living adjustment beginning in January.

Set Goals for 2005
I have been elected to the Board of Directors of the Orange County Financial Planning Association. I am also the Education Chairperson for the FPA and the leader of the Orange County NAPFA study group. There goes my spare time for golf.

Don�t forget to think ahead and plan what you want to accomplish in 2005. A goal to work on or a milestone to achieve makes the journey much more meaningful. I will be swimming with dolphins (Discovery Cove in Orlando) this coming Easter Sunday with my family. I will be on vacation from March 25 to April 2, 2005 so plan your IRA and SEP contributions early.

If you obey all the rules, you miss all the fun. � Katharine Hepburn, American Actress

Sandra C. Field, CSA, MBA, CFP

API 3rd Quarter Update 2007

The Subprime Mess
Starting in the spring of 2005, adjustable rate mortgages became very popular because it allowed buyers to buy a house with an artificially low interest rate for an initial period, before resetting to a higher rate. The majority of the adjustable rates have a reset in two years. The peak of the resetting of the mortgages will be October 2007, when $50 billion will be switched to a new rate, according to Credit Suisse. The level of resets will remain above $30 billion for each month through September 2008.

In short, 12% of the nation�s total mortgages will reset for the first time this year or next.
The worst is clearly not over in the subprime mess. Some households will cut back on spending or refinance to a rate they can afford when their time comes. It is estimated that 1.7 million will lose their homes to foreclosure when their rates reset. They simply can not afford the new rates. Dr Adibi, Chapman University, informed us last year that fully 23% of all new loans in California were purchased with interest only loans as the down payment! So many of the new home buyers did not put any money down toward the purchase of their house and in a sense, have only been renting the mortgages until the bank comes to foreclose. The housing market is still a limited portion of the US economy but I still worry about the trickle down effect to consumer spending.
What can anyone do? If you want to buy a new home- wait it out. Homes prices will continue to fall as the inventory of homes for sale swells to new records. There will be very motivated sellers- some are already offering vacations, upgrades and deep discounts to sell their homes.

Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things you only hoped for.
Epicurus quotes (Greek philosopher, BC 341-270)

Hedge Funds Need Attention
James Simons, the highest-paid hedge-fund manager last year who was paid $1.7 billion in compensation, could pay enough in Medicare taxes to provide health insurance for about 4,800 senior citizens. Mr. Simon�s income is largely exempt from Medicare and other payroll taxes because it is considered a capital gain. US House of Representatives have a proposal seeking to raise taxes on hedge-fund and private equity managers by changing how their income is classified. If they change this, it would raise as much as $1 billion annually and cover the cost of insuring about 98,000 people. this is one more reason I don�t like hedge funds!

The income gap is worsening. The rich are getting richer and the poorest class is expanding. Luxury items are selling well: Porsche, Neiman Marcus, Nordstrom, Tiffany and Saks Fifth Avenue all show strong sales. Wal-Mart, Costco and Target are not doing as well. As foreclosures and bankruptcies increase and consumer discretionary income decreases, sales will fall for autos, home builders, and big ticket items. Major purchases will be postponed.

The Big Cut
Well, I was surprised by the 50 basis point cut and so was Wall Street. I expected 25 points now and 25 in October. The Fed has always taken very measured steps. It also tells the future trend by the words in their statement.

�Developments in financial markets since the committee�s last regular meeting have increased the uncertainty surrounding the economic outlook.� That statement, and the 50 basis point rate cut, leaves me a little worried over the state of the economy, and the fear of a recession in the near future. I do not think they would have moved this aggressively with a rate cut if they did not foresee some sort of trouble ahead. I also believe we are only one third of the way through the worst of the mortgage mess. This makes me keep a somewhat defensive position with portfolios. On a more positive note, we are entering into a presidential election year in 2008. This is usually a positive year for the equity market. The market outlook may change if a Democrat is elected because tax and estate rate changes, and an increase in the capital gains rate will be anticipated.
September was the third straight month of moderate growth for employment. Private sector payrolls continue to grow as manufacturing and goods-producing jobs continue to fall. Many of the lost jobs were likely in the housing industry. Mortgage lenders slashed jobs nationwide and other financial related jobs will continue to be lost.

The US dollar has declined 45% against the European currency, the euro, and has hit all time lows. The dollar is also at a 30 year low against the Canadian looney. This may be the reason TD Bank Financial has purchased Commerce Bancorp. This purchase of Commerce will double TD Bank�s business in the US. TD Bank owned 58% of TD Waterhouse prior to the merge with Ameritrade. TD (Toronto-Dominion) Bank is the largest Canadian bank. I will not be surprised of an announcement if TD Ameritrade buys another brokerage company, such as e-Trade.

Summer comes to an end
Four ocean swim races (including a two mile swim from Hermosa Beach to Manhattan Beach) and a triathlon kept me busy the past quarter. I also have a new eight week old golden retriever puppy who is rearranging the landscaping in my back yard. Sleepless nights just like having a new baby! My 13� year old golden retriever is not amused that I brought a new puppy home.

Live as if you were to die tomorrow. Learn as if you were to live forever. - Mahatma Gandhi

On a Sad Note
I am writing about this here so you don�t ask me about it when you see me. Many of you know my best friend of 29 years, Gail, had been battling breast cancer for the past ten years. The cancer spread to bone, liver, lung, spine, ribs, and kidney as she fought her battle. She passed away in August, just five weeks after we returned from our cruise to Italy, Spain and France. It was her last wish to see Italy, she was determined to see it, and she did. She was the bravest and most courageous person I know to fight her battle and live life to the fullest, every day and every moment. This is something we should all live life by. Celebrate life and get out and live it!

Life is short, play hard.
Life is worth the fight!
Gail Moreno 1952 - 2007

API 2nd Quarter Update 2004

  A few weeks ago, Ronald W. Reagan, 40th President of these United States, passed into history. We all have our memories of what President Reagan meant to us personally, but in a world of growing hostility, geopolitical chaos, hatred and enmity toward the U.S. it was hopeful to see former enemies and friends alike, from all over the world, come to pay tribute to Reagan, the man.

His partner in history Mikhail Gorbachev, former Prime Minister and leader of our great nemesis the old USSR, paused a long moment to quietly lay a hand upon his coffin in friendship. That spoke more eloquently of Reagan�s character and will be my personal picture of President Reagan�s passing, and legacy.

It was a tribute to Reagan�s optimism, and to his personal kindness, likeability and hope for the future, that even those who disagreed with him could not bring themselves to dislike him personally. He was elected at a time of darkness and doubt about America�s future. Inflation was soaring, Communism was a looming menace, and unemployment was soaring into double digits for the first time since the Great Depression.

It was into this vacuum of hope that Ronald Reagan strode with a confident, almost foolhardy optimism, telling Americans that hope was not lost, that Americans could become great again. To a people desperate for some light in their future, his candidacy and his message was the relief of a spring to a man dying of thirst in the desert. People do not gravitate towards despair, but towards hope; not towards hate, but towards love. Excerpt from a great tribute to Regan from Robert Laest, a portfolio manager.

People think of inflation as prices going up. It�s not. It�s the value of money going down. ~Ron Muhlenkamp, portfolio manager~

Inflation and Interest rates

The Fed raised interest rates .25 on June 30, the first time in four years. The largest rate hike in history came between February l978 and November 1980 when the long bond yield rose from 8.12% to 12.13%. I remember when mortgage rates were at 17%. Our last significant rise was in October l993 to November l994 when the 10 year bond rose from 5.4% to 7.9%, while the S&P 500 index stayed flat.

If the yield curve begins to flatten (currently steep), this would meet the Fed would begin to raise short term rates but the intermediate and long term rates would remain relatively stable, reflecting low expectations for inflation. The CPI rose 0.6 in May, the biggest monthly jump since January 2001. The core rate, however, was up 0.2 percent, a very modest rate. The next Fed meeting is August 10. I expect more interest rate increases before year end. Many economists are expecting the rate to rise from 1.0% to 2.25%, in several increments, from now until the end of 2005.

Focus on Earnings Growth

I continue to see positive economic improvements, both at the company level and in the macroeconomic environment. Despite strong earnings growth and the healthy investment environment, investor emotions can hamper stock prices. Investor sentiment and perceptions affect the market because current stock prices reflect future expectations.

I believe many have underestimated the extent of the operating leverage created and the corresponding resulting EPS (earnings per share) gains. Operating leverage is leading to a virtuous cycle. Companies are now more productive and more profitable. The strong earnings give CEOs confidence, which then leads to further investment and a more normalized capital spending level. Healthier spending boosts revenues and confidence again. Better profitability and growth ultimately enhance shareholder value and drive stock prices higher. Consumer confidence is currently high.

Fear over the Fed raising interest rates, current events in Iraq, the upcoming Presidential elections, or commodity prices may have a temporary effect on the markets, but the improvements in the economic environment are tangible.

When the tide goes out, we will see who has been swimming naked. Jean-Marie Eveillard, portfolio manager, First Eagle Global Funds.

The above quote was in reference to how conservatively he manages his funds. He is heavy in cash right now and says he would rather lag the market and lose half his shareholders than be aggressive and lose half of the shareholders money. He is a value manager who buys at intrinsic value, like Warren Buffett, Graham and Dodd.

In May, I attended the Advanced Planners Retreat in Colorado Springs. I was able to meet personally with Ron Muhlenkamp of Muhlenkamp Funds, Jean-Marie Eveillard of First Eagle Funds and Bill Fries of Thornberg Funds. Bill Fries and I shared a round of golf and his views of the market and coming events. He was recently named International Fund Manager of the Year for 2003 by Morningstar. When he apologized after several errant golf shots, I replied that my clients would rather have him as a good portfolio manager than a good golfer.

Climb the mountains and get their good tidings. Nature's peace will flow into you as sunshine flows into trees. The winds will blow their own freshness into you, and the storms their energy, while cares will drop way from you like the leaves of autumn.
~John Muir~

Summer is here! Get out and enjoy the season with friends, BBQs, movies, golf or a good book. I will be on vacation August 23 to September 2. in Hilton Head, So. Carolina, visiting many beautiful golf courses.

Happy 4th of July!
Sandra C. Field, CSA, MBA, CFP

API 1st Quarter Update 2004

  2004 is off to a good start! The market declined in the first quarter in each of the past three years, by a significant amount. The market had a correction in the first two weeks of March, which was needed and a 5% correction was anticipated. Company earnings are clearly improving. I anticipate 2004 to be a positive year for the indexes and our portfolios, barring more terrorist activity or other unanticipated activities. The presidential election is another factor to consider.

Changes to the Dow

Three stocks are being replaced in the Dow 30: AT&T, Eastman Kodak and International Paper. The three are slated to be replaced by telecom leader Verizon, insurance giant American International Group and drug company Pfizer.

The stocks being deleted had a combined Dow tenure of over 200 years. Eastman Kodak and AT&T have been members since the 1930s. The changes in the Dow reflect the trends within the U.S. stock market, including the continued growth of the financial and health-care sectors and the diminishing relative weight of basic-materials stocks.

It is the market capitalization of the companies that is most interesting to me. AT&T has a market cap of $15.3 billions and its spin-off, Verizon, has a market cap of $104.2 billion. Pfizer is the most highly valued of the companies being added to the Dow, with a market cap of $271.3 billion and AIG with a value of $191.9 billion.

The Dow will now have four major financial components, as AIG joins J.P. Morgan, American Express and Citigroup. Joining Merck and Johnson & Johnson, Pfizer's addition brings the number of drug stocks to three. Verizon will join SBC Communications as the index's makeup grows to two telecommunications stocks.

There is tremendous happiness in making others happy, despite our own situations. Shared grief is half the sorrow, but happiness when shared, is doubled. If you want to feel rich, just count all the things you have that money can�t buy. Today is a gift, that is why it is called the present. ~~ Unknown author

Jobs and Unemployment

Jobs were created in February and March as the unemployment figures fell. The outsourcing of employees continues to grow within large US corporations as many jobs are being outsourced to India and China. California lost 261,000 manufacturing jobs in three years, most likely due to our awful worker�s compensation insurance rates. Is this an area of concern for our political arena? In the last recession in the early l990�s, about 1.3 million jobs were lost due to technology and business restructuring, many in the manufacturing area. More than one million jobs went to China and Mexico. However, the U.S. Economy created more than 2.2 million jobs in the service sectors like health care, business, education, entertainment and computer services. Globalization benefits American companies, consumers, workers and shareholders. U.S. companies save 50 to 70% through lower costs. Every job outsourced should generate savings that are reinvested for creating new industries and technology.

Business spending on capital equipment appears to have increased at a very good rate so far this year. As capital equipment spending continues, companies will begin to hire soon, as strong demand continues. Kiplinger California Letter reports 32% of companies have planned hiring increases. This is very positive in light of our worker�s compensation problems, state budget trouble, a record debt offering coming out next month and high taxes. Being a native Californian, I can overlook all those problems to continue to live in this beautiful area and climate as my relatives shovel snow in Minnesota.

Office rents will start rising again, but the increases should be modest. Warehouse and factory space is going to cost more this year and shopping centers can�t go up fast enough in LA, Orange County and San Diego.

Federal Reserve officials have stressed that slow job creation -- combined with what have been modest levels of inflation -- allow policy-makers to keep interest rates in place that are at their lowest in four decades. I believe they will stay low as the Presidential election takes place in November. Baring any �hanging chads�, we will have stability in the markets and hopefully in the White House. Since I never disclose my political bias toward one party over the other, you still can�t read anything into that last sentence!

In politics, if you want anything said, ask a man- if you want anything done, as a woman. ~~ Margaret Thatcher

Sandra C. Field, CSA, MBA, CFP