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Thursday, July 23, 2015

2nd National my Social Security Week

From July 19 – 25, Social Security will celebrate its second National my Social Security Week. Activities across the country will include email blasts, news articles, social media posts, posters and banners, registration events, and more!

Why all the activity? Because a personal my Social Security account is the most convenient way for people to access and manage their Social Security information online. Taking advantage of this convenient, cost-effective, and secure service allows workers to plan for their financial future and enables them to verify that their information on our records is correct. This is important since earnings are the basis for determining the amount of future retirement benefits. For people who already get Social Security benefits, my Social Security is the easiest and most convenient way to manage their benefits and get an instant benefit verification letter, change their direct deposit information, and much more.

As of April 2015, almost 19 million people have opened my Social Security accounts. In fact, someone opens a new my Social Security account every six seconds.

Join the millions and sign-up for your free my Social Security account this week. It’s the perfect time to open an account and start planning for retirement or managing your benefits online. You can sign up today at www.socialsecurity.gov/myaccount. 

Tuesday, June 30, 2015

LJPR Summer Commentary

Summer Commentary

Markets:  Global markets continued to send a mixed message through May and into June with signs of weaker global growth, combined with strong manufacturing numbers, modest acceleration in wage growth and good job numbers.  The major points from our Outlook at the beginning of the year are still on target. Given the dollar/euro and lower energy prices (which help consumers like Europe), we’ve recently increased our allocation to a slightly stronger position in developed international markets including Europe.  The strong dollar is a mixed blessing:  it’s great for imports and bad for exports.  When we buy Saudi oil, we are getting a relative bargain.  When we sell American goods abroad, they’re more expensive.  Given that analysis, we believe the developed international markets are improving in terms of growth potential.  This growth is supported by lower local currencies and easy monetary policies, which should offset the drag of a continued stronger U.S. dollar. 

Greece: While no one can anticipate what the outcome will be regarding the situation in Greece (their debt issues and whether they will remain in the Eurozone), we believe client portfolios are well positioned regardless of the end result.  As of this writing, the Eurozone is working toward a deal before Greece’s bailout program ends at the end of June when they need to pay the International Monetary Fund (IMF) 1.5 billion euros – basically money they don’t have.  The central bank in Europe is trying to strike a balance between safeguarding the country’s central bank and keeping Greek lenders in business, which is providing the aid, while the Greek government veers toward default.  By the time you are reading this, the situation will have likely changed several times.  To put the Greek situation in perspective, their overall debt represents around 175% of their GDP – not a good thing (anything north of 90% is a drag on further growth). As far as the size of their economy in global terms – it is a little bigger than the state of Oregon. 

Should Greece default or exit the union, the initial reaction of the markets will likely be negative with expectations of a quick recovery, barring any meaningful contagion fears. Our recommended allocations are positioned adequately given our outlook for the remainder of the year whether a deal is worked out or not (if it hasn’t by the time you are reading this). We would view any pullback in the markets from a Greek default or exit from the Eurozone as a rebalancing and buying opportunity for the region as a whole and would consider moving to an overweight position in developed international markets as the dust settles from the fallout. The situation there is constantly changing and we are keeping a close eye on developments and will make adjustments as conditions warrant.

Oil:  Energy has moved higher, off its lows when we had moved to increase our dedicated exposure to the sector – this has been a positive for returns.  We continue to closely monitor this area of the market.  Our thesis at the beginning of the year, that lower oil prices would benefit emerging markets, continues to do well on a year-to-date basis. Not surprisingly, when oil prices are low, people use more (drive up I-75 on a weekend if you don’t believe it).  Demand is up, and the curve shows that demand is increasing at a more rapid rate than supply.  We think oil will continue to rise in price, and geopolitical risks in the Middle East or Russia could accelerate the price increase.

Politics and Geopolitical Risk: LJPR’s outlook for domestic politics and geopolitical risks has not changed. We expect continued gridlock in Washington to last at least through 2016. It appears that close to 20 people are now running for president, so investment in television ads and/or earplugs might be useful.  Russia, ISIS and North Korea continue to be the areas of concern and wild cards for potential negative shocks to global markets. Cyber-warfare is starting to really rear its head, and we will be working on a cyber-security seminar again in the future.  Recognize that geopolitical risk is always there and maximizing diversification in portfolios continues to be a key element in helping protect from these risks.

The Fed:  Expectations of the Fed’s interest rate hike this year is still the consensus within the investment community, even in light of the negative growth numbers for the U.S economy that were reported for the first quarter of this year and the commentary from the Fed after their meeting this June. Once the Fed does start to raise rates, there is a strong probability that the pace will be slow and gradual.  While there may be negative market reactions initially, similar to the last “taper tantrum” in 2013, expectations of a rising rate environment are priced into the market and the expected gradual pace should help to minimize downside risk; particularly to those investments with interest rate risk exposure.  Keep in mind, rising interest rates are ultimately a positive for the U.S. economy – meaning the economy is on solid footing and growing along with a return to a more normalized interest rate environment.  We’ve shortened our duration on our bond side, so we can take advantage of a rising rate environment.

Our goal for clients is to make sure the fixed income side of portfolios are adequately protected in an environment of rising rates.  While we have never tried to time rate increases or their magnitude – no one knows with any certainty the direction of these variables (not even the Fed at this point), we do believe some minor adjustments to our target bond allocations were warranted by decreasing the sensitivity of portfolios to rising rates. Should market conditions or indications change, we will adjust the portfolios further.

Next step:  Things are good, but not great.  We have had a 6-year bull market after the Great Recession, without a meaningful correction (10% or bigger drop).  It’s been almost 7 years since the last recession, a recovery period that is historically quite rare.  It seems obvious we will get a correction in some market, probably the US.  It also seems immanent that we will have some form of slowdown.  Here’s a statistic that we should all soak in.  If you had a portfolio that had in it the S&P 500, which all of our portfolios do have, you would have experienced an 8.09% return for the period 1994-2014 (source: Morningstar).  If you missed the 10 best days in that 20 year period, you would have only made 4.41%.  Miss the 30 best days?  -0.12%!  Miss the 60 best days and you had an annual return of -5.36%.  To exacerbate this, mutual fund trades take place at the end of the day, so to dodge a bad day, you have to get out the day before the bad day.  To get one of the best days, you have to get in the day before.  We don’t know how to do this, and as far as we can see, neither does anyone else.  So when the market corrects, we will rebalance.  History tells us to stay diversified and make adjustments to the mix, but also tells us to stay in. 

Happy summer!
Leon and your LJPR team

Monday, February 2, 2015

Deconstructing the S&P 500

Deconstructing the S&P 500: How 36 Stocks Gave You 55% of the S&P's Return in 2014


Like a lot of investors, I watched the S&P 500 Index do very well in 2014, especially compared to holdings in small caps, international, and emerging markets. We own the S&P 500 index as a holding and I'm happy about that.  However, I couldn't help wonder how the S&P did so well. The pundits were decrying the death of active management, and new records on the S&P fell daily as the rest of logical investments sat relatively idle. So, I worked out a trusty spreadsheet with help from friends at Highland Capital, and deconstructed how the S&P did. The results are startling: 36 stocks out of 500 provided over 55% of the total return.

Knowing what the S&P 500 is made up of is important. Essentially, it is an index of 500 stocks selected by the S&P US Index Committee. It's not-contrary to popular belief-the 500 biggest US stocks. The S&P 500 is based on market capitalization, so a big company occupies a much larger portion. Apple, for example, is one stock out of 500, or 0.2% of the total number of stocks, but it is 3.25% of the weight of the index. Apple's return has a very big effect on the overall S&P return (more on this in a minute). WPX Energy is another stock in the S&P 500, but makes up only 0.0058% of the Index. The bigger the company, the more it affects the index and, subsequently, how it performs. Southwest Airlines was the best performing stock in the S&P 500 last year (low oil prices helped, and I suppose they save big on meals), but its only 0.11% of weight of the S&P, so it's 126% return only added .73% to the S&P's total return.

Now for the deconstruction:
  • The top 36 stocks in the S&P 500 provided over 55% of the total return of the S&P for 2014.
  • The top 5 stocks (Apple, Microsoft, Berkshire Hathaway, Intel and Wells Fargo) contributed almost 20% of the total return of the index.
  • Apple by itself contributed 8% of the total index return for 2014, while Exxon contributed a negative 1.17%. Apple contributed almost a third of the total amount from all technology stocks.
  • 35% of the stocks made all of the return for the year.
  • Real estate is only about 2% of the S&P 500, but provided 4.25% of the total return.
  • Energy was an obvious drag.
What's the moral of the story? We all know that diversification is key, but this review should be enlightening.

You only needed 35% of the S&P 500 to get all of your return, but which 35%? It reminds me of a story attributed to John Maynard Keynes, who was asked how many stocks you needed to own. His response was "One".  The interviewer then asked "Which one"? Keynes replied, "The one that makes the most money." The interviewer then asked, "How do I find that one?" Keynes' famous response: "Wish I knew!" So for 2014, you may have loved Apple, but you were really happy with Southwest Airlines (+126.3%). You were probably unhappy with Transocean (-59.9%). But if you owned the whole basket, you owned them all. It's the concept of diversification: have parts of the whole world, and enough to make sure you own the winners.

Leon

Wednesday, December 17, 2014

Congress in Action

Congress in Action (err...Inaction)
Alan D. Miller, CPA, PFS
December 17, 2014

In a new show of bipartisanship, the lame-duck Senate finally passed the 'temporary' one-year extension of a hodge-podge list of about 50 tax provisions that had expired at the end of 2013.  The 'tax extender' package retroactively reenacts these tax deductions and credits effective January 1, 2014, but they expire December 31, 2014. The House previously passed a two-year 'extender' package (which included permanent extensions of certain provisions) that, under a threat of a veto by the President, went nowhere in the Senate. Instead, the House passed a one-year extension last week and after some other important business (including funding the government) adjourned and went home for the holidays.  Also wanting to go on vacation (and without the House being in session to consider changes), the Senate voted 74-16 to approve the one-year extension. The President is expected to sign the bill into law this week.

With two weeks remaining in 2014, individuals, families and business owners, along with their tax and financial advisors can finally get to work planning their 2014 tax situations, largely by looking in the rearview mirror. Cheers! Don't forget to save time for year-end holiday activities too!

Most of these provisions were previously enacted temporarily, yet have been extended many times in one form or another, one or two years at a time.  Some offer significant tax breaks to a very narrow constituency (quick expensing of NASCAR race track improvements and race horses) and others offer small benefits to a broader swath of taxpayers (exclusion of up to $250 of classroom supplies purchased by educators). Some offer tax breaks primarily to residents of certain states (deduction of sales tax paid instead of state income tax paid) or for the benefit of retirees and charities (being able to donate IRA withdrawals directly to a charitable organization).

Some were first passed to stimulate the economy during one financial downturn or another (immediate write off of up to $500,000 of equipment purchases by businesses), but due to the fact that there is a very short time for businesses to actually plan for this deduction for the remainder of 2014, they may have limited economic stimulating effects going forward.  Did the owner of the widget factory purchase that 3D widget printer last spring because Congress might allow a juiced-up tax deduction or because her company needed it to keep up with the demand for widgets caused by an improving economy that was already happening?  Other provisions were implemented to reward or encourage specific activities (tax deductions and credits for college expenses or for the purchase of energy efficient property).

Depending on which argument you believe in, each provision either cost the government billions of dollars of revenue or saves taxpayers an equal amount of taxes. The cost/saving of this bill is projected to be $42 billion over 10 years. Regardless of the side you take, there are no doubts these provisions and the question whether they will or will not be an ongoing part of tax landscape add to the complexity of the tax law and to the uncertainty with which individuals and businesses deal in planning their financial activities.

Of the many extended tax provisions, those that have the most potential impact on our clients are summarized below (listed in order of the section of the tax code that is affected):

INDIVIDUALS

Deduction for certain expenses of elementary and secondary school teachers

Allows a deduction from adjusted gross income of up to $250 of expenses paid for materials, supplies, technology, etc. for use by an educator in the classroom.

Deduction of mortgage interest premiums as qualified mortgage interest

Treats mortgage interest premiums as mortgage interest expense deductible as an itemized deduction.  This phases out ratably for taxpayers with adjusted gross income in excess of $100,000-$110,000 (half those amounts for married filing separately).

Deduction of state/local sales tax in lieu of state income tax

Taxpayers may elect to deduct as an itemized deduction state/local sales taxes paid (either actual or amount determined based on income) instead of state income taxes paid. (This may be beneficial to retired taxpayers who pay little or no Michigan income tax or residents of a handful of states that do not impose an individual income tax).

Above-the-line deduction for qualified tuition and related expenses

Provides for a deduction from adjusted gross income of qualified college tuition, fees, books, etc. of up to $4,000, depending on adjusted gross income and filing status.

Tax-free distributions from individual retirement accounts for charitable purposes

Allows tax-free distributions from IRAs to charitable organizations of up to $100,000 per taxpayer if at least 70 ½ years old (a married couple may make tax-free distributions of up to $200,000). The amounts contributed in this manner cannot also be deducted as charitable donations.

Credit for purchase of non-business energy efficient property

This provision continues credit of 10% of the cost of certain energy efficient property (furnaces, water heaters, windows, etc.).  The maximum cumulative 'lifetime' credit allowed under this provision is $500.

BUSINESS TAXPAYERS (including individuals with small businesses)

Bonus depreciation

Allows for immediate expensing of 50% of the cost of certain property and equipment placed in service during 2014.

Increased expensing limitations under Sec. 179/treatment of certain real property as Sec. 179 property

Allows for immediate expensing of up to $500,000 of eligible equipment purchases made in 2014; also allows for special treatment of certain real estate purchases as personal property (specifically aimed at retail and food-service businesses).

There are many other provisions with limited applicability to most individual or small business taxpayers.  If you have questions about the items noted above or other extended tax provisions that may affect your specific tax situation please don't hesitate to contact us.


Monday, December 1, 2014

Why We Don't Chase Returns




This year, 2014, has been interesting so far. One major asset class, large US equities, is doing very well, compared to most other asset classes.  That’s great if you own large US equities (and we certainly do!). Having other asset classes, like small cap stocks and emerging markets, can make it trying, since all we ever hear about is the S&P 500 or the Dow. Ever hear the commentator on the news say, “today the MSCI Emerging Market Equity Index was up 1.4% on lower oil prices”?  A question we sometimes get is: ‘Why aren’t we doing as well as the Dow/S&P/NASDAQ?’  Well, two observations:  While we like large US equities, they are not the only asset class.  Small US equities historically have outperformed large US equities. Can you name a large stock that wasn’t once small?  Additionally, international equities provide valuable diversification and real estate is also a good asset class.  Although we can talk about it, it may be just as easy to show, so here’s a chart from JP Morgan:

If you are correctly interpreting the chart, it shows the nine major assets classes (we use them all) and an asset allocation somewhat similar to ours.  So in 2006, REITS, which we have, did stellar (35.1%).  In 2007, they were the worst (-15.7%).  In 2008, cash was second best, and in 2009, cash was worst.  Similarly, in 2008, emerging markets did terribly at -53.2%, followed by being the best performer in 2009 at +79%. The last column shows the annual return of each class.  It’s interesting to note that over 10 years, the asset allocation portfolio did just slightly less than the S&P 500, with considerably less risk (it’s about 35% fixed).

The point of this chart is straightforward:  no single asset class ever dominates the chart, and frequently the top performer slides to the lowest performer.  If you look closely, the light blue ‘allocation’ mix was in the middle-upper portion of the table the entire ten year period, and this holds for longer periods as well. That’s the strategy of asset allocation:  don’t try to hit the ball out of the park, win the game.  And the sweetener?  Rebalance it so that you take profits off the highest asset classes and buy more of the lowest performing asset classes.

One last note:  Cash, as we all know, is not really an investment, but a form of liquidity and a protector.  Note the relative position of cash in the long run.

Leon



Thursday, November 6, 2014

What We Think The Elections Are Telling Us

Well, the elections are over and we can now watch attorney ads instead of nasty political ads. In general, the election went as we predicted. The Republicans have taken the largest house majority since WWII and now have the Senate. The question is what does this mean? 

There are two options: the GOP assumes a leadership role and tries to pass legislation (that the president will sign); or continues obstructionist roles. If the obstructionist strategy continues, we will have more brinksmanship and battles. On the other hand, if we get cooperation, a variety of things could happen. A possible outcome is that Paul Ryan will push for tax reform.

The low hanging fruit is corporate reform and repatriation, which would bring billions back into the US for capital expenditures and buybacks. Right now, it is beneficial for corporations to leave their profits abroad rather than bring them home, due to our corporate tax law. Burger King just changed its headquarters to Canada. As my friend Greg Valliere says, "When I say the words 'tax haven' and 'Canada' in the same breath, our tax system is broken." 

The tax extenders, like the qualified charitable distributions from IRAs are likely to pass before year-end. It is unlikely anyone will touch Medicare or Social Security before 2017. Obamacare will still be here, but they may remove the medical device tax and the employer mandate (that depends on Obama's pen). It is unlikely we will see individual tax reform. It sounds good, but everyone will start cobbling on their favorite things: "What about charitable contributions? Mortgage interest? Small businesses?"

Spending is unlikely to increase by any significant measure. Defense spending needs to be maintained, so something will likely happen there. We think Keystone will re-appear, and possibly pass. I am sure out of 535 people, someone in that group will have something to say about Obamacare.

In Michigan, Rick Snyder won re-election and Gary Peters was elected to the Senate. That outcome is interesting because of the party shift. Obviously, a portion of the electorate crossed party lines and voted for the candidates, not necessarily the party. Our prediction is Governor Snyder will continue his current policies of fiscal responsibility, and hopefully address roads, education and jobs. Senator Peters was formerly on the House Financial Services Committee. Both were supporters of the Detroit Grand Bargain. We think the outcome is a 'stay the course' vote in Michigan.

History shows us the very best market situation is a unified congress and lame duck opposition president. In fact, the Republican Senate/House and Democratic president has historically been best for the markets (maybe we remember that one of the only surpluses ever was in the Clinton-Gingrich days). So we are slightly more optimistic. Of course, Congress could just stay obstructionist, which we think enhances Hillary Clinton's position for 2016. One last word: if you have an old car, you might be able to keep your bumper stickers for 2016; you could have Jeb Bush run against Hillary Clinton.

Leon

Monday, October 20, 2014

Why we are rebalancing now

Unless you’ve been on a beach without cell phone service (in which case, I envy you), the market is exhibiting a vast amount of volatility and uncertainty.  In today’s world, we can find explanations for everything.  Amongst those is how the drop in oil prices and strong dollar are hurting the market, or that Europe is slowing (I hate to tell Europe, but they have been slow).  We see the glass half-full, and not half-empty.  Here’s why:

 Oil.  Oil prices have “tanked” (down over 20%), which is bad for oil companies and good for everyone else (OK, it’s bad for ISIS, Iran, Iraq and most of the Middle East, but I’m not overly concerned with their financial well-being).  Low crude is a stimulant for the consumer and for profits.  My family spends about $10,000 a year on gas; so a 20% drop in oil prices is like $2,000 in my pocket, tax-free.  Low oil prices are good for consumers and corporate profits.

·         Europe.  Most of the volatility centers around the inaction of Mario Draghi and the European Central Bank (ECB).  The ECB has been too tame in monetary policy, despite many verbal pledges to do whatever it takes.  This may be sending Germany into a recession, and Germany is the strongest EU member.  Greece suffered under the assumption that they may default on their debt.  Not a big surprise since Greece was the first sovereign nation to ever default on their debt in 377 BC and has five debt defaults modern times.  Spain has defaulted 13 times.

·         Talk is cheap. The ECB has been talking but not doing.  This leaves two options:  they can keep doing nothing (which lets the economic march continue), or they can do something (like Quantitative Easing).  A QE type move would probably be good for stocks in Europe.  I’d predict the pressure is on the ECB (and the Chinese Central Bank) to do something, and rather quick.

·         Our economy.  The budget is being cut, unemployment is down, and sentiment is up.  Profits are not terrible, and consumer spending is up along with industrial production.

·         Strong dollar.  The dollar is strong against other currencies.  Why?  Because we are improving our account deficit, booming energy production (hence low crude prices), and reduced unemployment.  Because we are growing, we look good, and it shows.  It also makes imports cheaper, and hurts foreign companies who sell in dollars, but build in other currencies (like Airbus or Swatch).  

·         So why the volatility? I think a bunch of this is the market looking for an excuse.  A few days ago, I joked that the S&P 500 was about to break its 200 day moving average and that it would tank when the program trades kicked in.  It did.

·         Ebola.  Scary stuff.  It’s a horrible disease.  Right now one person has died and two have it in the United States.  So that’s 3 out of 330 million.  In 2010, 53,826 people died of influenza and pneumonia, 576,691 died of cancer and 1 in 700,000 people were struck by lightning.  I offer this as perspective.

·         Factoid on elections.  Interesting fact on mid-terms:  since 1950, there have been 6 calendar years when a Democrat was in the White House and the Republicans controlled the House and the Senate.  The average gain on the S&P 500 during those 6 years was 21.3%. 

What’s our prognosis?  Low oil is good.  Strong dollar is good.  Fundamentals for the US look good.  We believe in capitalism and free enterprise.  If you think owning businesses (stocks) is way to increase wealth, you are right.  So volatility like this requires us to look at the big picture and see if equities are actually vastly worse than they were a month ago, or whether they are merely on sale.  It’s like a big rain storm.  Eventually the sun comes back out.  We choosing to rebalance and take advantage of the opportunity.

If you’d like my commentary on the economy, markets and the elections, I’ll be giving a talk on October 28th at Walsh College at 1:00 and 6:00.  I’ll cover oil, the dollar, gold, stocks, taxes, and whatever else crosses my mind, and will predict that political advertising will decrease abruptly by November 4th (this one I’m sticking by).  If you’d like to join us, RSVP at events@ljpr.com or 248-641-7400.  Space is limited.

Leon