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
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.
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
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
It is better to deserve an honor and not receive it, than to receive one, and not deserve it!! Mark Twain, 1835-1910, American Humorist, Writer
The above quote is dedicated to my beloved Trojans. USC should have been ranked #1 and selected to play in the BCS Sugar Bowl instead of playing in the Rose Bowl against Michigan. USC beat Michigan 28-14 and were voted #1 in the AP poll after the Sugar Bowl.
USC Trojans are National Champions!
Looking back, looking forward
In addition to the Trojans football record, 2003 was a very good year. I am feeling more positive about the economy, productivity, manufacturing and the job market for 2004. The market has slowly and steadily risen over the past year.
The small capitalization companies have performed best, with an average gain of 40%. Mid-cap companies have gained an average of 30%. I believe as the market recovery continues, the large-caps will catch up to the gains of the small and mid caps. The S&P 500 returned 28.7% in 2003; this was the best return since l997. From the October 2002 market bottom, small-caps, as measured by the Russell 2000, continued their outperformance over the S & P 500 ( 73.1% vs. 46.4%) as well as for the one, three, and five year periods. This was the best return for the Russell 2000 since l979.
Interest rates may remain low since we are in a presidential election year. I do not expect interest rates or inflation to raise more than .25 to.50% over the next 6 months.
Ask yourself this daily question: How would the person I want to be do the thing I�m about to do? Jim Cathcart, professional Speaker/Author
Qualified Contribution amounts increased
The 401k, 403b, 457 limits have increased to $13,000 with an additional $3,000 catch up provision for those over age 50. IRA contribution limits remain the same at $3,000 plus $500 for the catch up provision. The estate tax application exclusion increased to $1,500,000.
One of my close friends is Lynne Cox, the renowned long distance swimmer and now, finally, an author. Her book is available to the public on January 13 and she is beginning her 13 city book tour this week. The book is Swimming to Antarctica-Tales of a Long-Distance Swimmer. Lynne is in People magazine this week and named one of the top women in the world by Glamour magazine. She recently appeared on David Letterman, 60 Minutes and will be on Ellen January 19th. Oprah is also trying to schedule her.
I began taking ocean swim lessons from Lynne in the early 80�s once I started to compete in triathlons and ocean swims. I traveled to communist Russia (Siberia), Austria, and Germany with her as a team member as she completed swims in the late 80�s. Since I was the money manager (deemed a control position by USSR) for the team of journalists, crew and entourage, I had the privilege of having my home phone tapped by the FBI and CIA for many long months. The book recounts many of her record breaking swims and the reason why she strives to swim for cold water research and to bring nations together. Los Alamitos will declare another Lynne Cox Day and we will be having a local book signing for her in this area. The book is a great read.
I am on the warpath over annuity companies. We had several client deaths this past year and have helped client beneficiaries� deal with redeeming annuities. Almost without reservation, I can tell you to never buy an annuity through your bank. Some clients were sold annuities through Washington Mutual and Wells Fargo banks and I have never seen such incompetence in the way the contracts were written.
If annuities are not correctly structured, they can become a living nightmare for the beneficiaries. Most annuities should not have joint owners or the trust named as the beneficiary when the spouse is living. When there is an IRA inside the annuity (always a no-no) the beneficiary structure is important to avoid taxation of benefits. The main problem I have with annuities is that they will not pay out the death benefit. The companies will require a ream of paper documentation, and then not process the claims until multiple letters and phone calls are made. We have found this with five different annuity companies and only two, Pacific Life and Jefferson Pilot, acted promptly and correctly. The worst companies are Jackson National, ING, Safeco, and Sun America.
If you have an annuity, you should have it reviewed for correct title and how the beneficiaries are named. You can make changes while you are living and mistakes can be corrected. Thirty minutes of your time now can save your beneficiaries hours of frustration upon your passing.
Your mind is your most prized possession, so don�t neglect it. Each of us must decide what kind of brain or memory capability we want and what steps we will take to get to our goal and stay there. There are different types of memory-memory for key ideas and memory for detailed facts. Almost everyone loses the ability to remember all the details as they age. In contrast, with practice, the ability to remember the big picture and key issues can be preserved into late life.
Here are the keys for good memory retention: Treat medical concerns. Memory loss can be a symptom of physical health problems such as diabetes, high blood pressure, thyroid problems and Alzheimer�s disease. Consider depression or any other mental aliment since any kind of mental illness affects cognition, a component of memory. Eat properly. Vitamin deficiencies cause cognitive decline. Folic acid, found in leafy green vegetables, is also vital to good mental functioning. Eat walnuts or almonds daily. Get enough sleep. Socialize. Isolation increases your risk of cognitive decline.
Researchers recently concluded a 21 year study of the elderly. They found participants who read, played board games or cards or played a musical instrument had a reduced risk of developing dementia. Dancing also reduced the risk, but other types of physical activity, like biking, swimming or golf, did not. (Since my golf game involves counting to high numbers when taking penalty shots and counting lost balls, it helps my memory retention!)
A tax expert is anyone who can read five pages of tax law without crying, or ten pages without laughing. Jim Boren, author, Wall Street Journal
Tax time rolls around once again. If you have your taxes prepared by Hood & Burch and would like to see me the same day as your tax appointment, give Lori a call. I can usually meet with you prior to or after the tax appointment.
After a review of my business plan and in order to better serve my clients, I have raised my managed account minimum size to $250,000. Thank you to all of you who have referred friends and relatives to Asset Planning, Inc. We are growing due to your referrals and have found success through service to our clients. This was one of the reasons we were chosen as a top wealth manager by Bloomberg. I greatly appreciate your referrals and the growth of the company.
I have written my goals for 2004, both business and personal, and hope you have done the same. Begin to plot the course of action you will take to meet your goals and visualize how you will obtain the end result.
�Nothing can add more power to your life as much as concentrating all your energies on a limited set of targets. Bend all of your energies to one point, and go directly to that point, looking neither to the right nor to the left.
Success is the result of well directed energy. The sun's rays do not burn until brought to a focus.�
Happy New Year 2004!
Sandra C. Field, CSA, MBA, CFP
Asset Planning, Inc
Let us realize that the privilege to work is a gift, that power to work is a blessing, and that love of work is success. David O. McKay
Our Big News
Bloomberg Wealth Manager Magazine, July/August issue, selected Asset Planning as one of the top wealth managers in the Nation. We are very proud of this honor. We again thank our clients for their continued trust in our abilities. I truly enjoy my work and clients.
Election and possible recall of our Governor
I actually miss the silly commercials for soft drinks, cheese (I like the talking cows) and fast food. I can�t wait until this election is finished and the campaigning and negative political commercials are over. I certainly hope we will have a better credit quality rating for California and lower workers compensation costs in the near future. This is history in the making for California. Remember to vote so your voice is counted.
The Labor Department said nonfarm payrolls grew by 57,000 last month, much better than the 15,000 decline expected by economists. The August number was also revised to a narrower loss. The unemployment rate stayed at 6.1 percent.
From October 1,2002 to September 30,2003, the Dow gained 18.94%, the NASDAQ gained a whopping 32.06% and the S & P 500 gained 18.51%. I expect the market to give and take since the movement in the past quarter has been great.
This is silly season of reporting earnings. I say silly, since a company such as EBAY can report great earnings and the stock price drops 14%. The reports are based on perceptions and forward internal growth rates. You can always expect added volatility in quarterly earnings season.
Mutual Fund complaints
The New York Attorney General Spitzer filed complaints against four mutual fund companies, alleging improper trading and market timing arrangements with a hedge fund, Canary Capital. He alleged Canary Capital, under agreements with such financial institutions as Bank of America, was granted special trading privileges, including access to illegal late-day trades, in exchange for fees.
Spitzer specifically named four mutual-fund operations -- Bank of America's Nations Funds, Janus Capital, Strong Capital Management and Bank One's Banc One Fund as taking part in the schemes.
At these fund families, only a few mutual funds were involved in the trading. Asset Planning has not used any of the mutual funds that were named in the allegation. This is one of the reasons I believe in such diversification among many funds. I like to spread risk and diversify among fund families and managers, seeking their independent thought process.
Last week's data shows strengthening in both capital expenditures and temporary employment.
Businesses are starting to spend, as indicated by increases in surveys of capital goods companies and temporary employment companies. The capital goods companies survey rose 2.8 points last week to its highest level since 1998�suggesting that old economy equipment capital expenditures probably rose in the third quarter. The use of temporary employees is at the highest level in nine months, another indicator that business is expanding. Industrial Productivity grew last month at an astounding 4.1% annual rate.
Although this looks like good news, there is still a lot of uncertainty about the economy, the course and duration of the recovery, unemployment and growing concerns over medical insurance and the cost of care.
The first wealth is health. Ralph Waldo Emerson (1803-1882)
October is Breast Cancer Awareness Month
Please support the women in your life and encourage them to have regular annual check-ups and mammograms, when they need one. October 13 is the American Cancer Society Women�s Classic Golf Tournament. This is the eighth year I proudly served on this committee. The money we raise from this tournament stays in Orange County to treat women in need of support, treatment, wigs, and to raise awareness. The tournament will always welcome business and individual support and sponsorship. A big thanks to those clients who support this event every year. Please join us next year!
As we approach year-end, we will be evaluating each portfolio for realized and unrealized capital gains. In light of the new tax law changes, changes may need to be made to some portfolios. For those of you 70.5 years and older, we will have most of the required minimum distributions (RMD) taken from the IRA accounts in November. This would not apply to those already receiving quarterly distributions.
There are only two ways to live your life. One is as though nothing is a miracle. The other is as though everything is a miracle. Albert Einstein (1879-1955)
Please schedule a meeting with me if you have life or employment changes, as these do have a bearing on your portfolio. What I want is to be a great financial advisor, to do an outstanding job for my clients, to make a difference in clients� lives, and to enjoy each and every day.
Sandra C. Field, CSA, MBA, CFP