Catalysts on the Horizon – Part 1

September 16, 2010

We continue to believe a late-year rally for stocks will fulfill our long-held outlook for modest single-digit gains on the year for the S&P 500. However, over the next month or two, the risk that the soft spot lingers and pulls the market back to the lows of the year is significant. Seasonal factors also favor caution given the historically weak performance in September and October. Since 1950, the month of September has more often led to a decline than a gain in the S&P 500 index. However, November and December have provided some of the best returns of the year, on average.

There are a number of potential catalysts for a fourth quarter rally:
1. At the Federal Reserve (Fed) Meeting on September 21, the Fed may announce additional stimulus measures to stimulate growth. On Friday of last week, in his speech from the Fed’s Jackson Hole symposium, Fed chairman Ben Bernanke seemed to pave the way for another round of monetary stimulus. Although he noted that the Fed needs to see more evidence of a slowing economy or further disinflation to act. Friday’s profit warning from a large Technology company is potentially significant in tilting the Fed towards easing should it be followed by a number of other companies in the coming weeks. The unemployment rate ticking up in the August employment report due to be released this Friday would move the Fed in the direction of more stimulus, as well. It may be unlikely the Fed will move as soon as a few weeks from now, there will be plenty of data released before the September 21 FOMC meeting that could show further softening of the economy, raising investor expectations for Fed action.

2. Positive pre-election policy discussions in Washington as incumbents seek to alter the tide of the popular vote — often termed an “October surprise”. In the weeks ahead of the November 2 mid-term elections, incumbents in Washington may take positive stances on issues that are market friendly. Incumbents are in trouble according to state and regional polling data. In seeking to turn the tide of voter sentiment they may talk about tax cuts or other issues favorable to stock market investors.


What is “The Fed”? (Part 3)

October 8, 2009

The most effective tool the Fed has, and the one it uses most often, is the buying and selling of government securities in its open market operations. Government securities include treasury bonds, notes, and bills. The Fed buys securities when it wants to increase the flow of money and credit, and sells securities when it wants to reduce the flow.

Sometimes, in order to understand why you need something, it helps to find out what it was like before that “something” was created. Before the Federal Reserve was created in 1913, there were over 30,000 different currencies floating around in the United States. Currency could be issued by almost anyone — even drug stores issued their own notes. There were many problems that stemmed from this, including the fact that some currencies were worth more than others.

There were even times when banks didn’t have enough money to honor withdrawals by customers. Imagine going to the bank to withdraw money from your savings account and being told you couldn’t because they didn’t have your money!

Before the Fed was created, banks were collapsing and the economy swung wildly from one extreme to the next. The faith Americans had in the banking system was not very strong. This is why the Fed was created.

The Fed’s original job was to organize, standardize and stabilize the monetary system in the United States. It had to set up a method that could create “liquidity” in the money supply – in other words, make sure banks could honor withdrawals for customers.

Source: HowStuffWorks, Lee Ann Obringer

What is “The Fed”? (Part 2)

October 6, 2009

The Fed uses three tools:

  • The reserve requirement
  • The discount rate
  • Open market operations
  • The reserve requirement is the balance that banks must maintain, which is typically a percentage of their total Interest-bearing and non-Interest-bearing checking account deposits (currently 3% to 10%), to ensure that the bank will always be able to give you your money when you ask for it. Changing this requirement has a very large affect on the economy and Is rarely used. The last time the rate was changed was in the early 1980’s.

    In the event that a bank’s money supply drops below the required reserve amount, that bank can borrow either from another bank or from a Reserve Bank. If it borrows from another bank’s excess reserves, then the loan takes place in a private financial market called the federal funds market. The federal funds market interest rate, called the funds rate, adjusts according to the supply of and demand for reserves.

    If a bank chooses to borrow emergency reserve funds from a Reserve Bank, then it pays an interest rate called the discount rate. This was lowered by one-half percent in late August in reaction to the “credit crunch”.

    The “discount rate” is the interest rate that a regional Reserve Bank charges banks and financial institutions when they borrow funds on a short-term basis.

    The discount rate often plays a larger role in the overall monetary policy than would be expected because it is a visible announcement of change in the Fed’s monetary policy. This is the most talked about rate and can affect your mortgage and credit card rates.

    The Fed more often alters the supply of reserves available by buying and selling securities. All of this buying and selling is referred to as open market operations.

    Source: HowStuffWorks, Lee Ann Obringer

    Vacation Properties and Income – Part 2

    September 14, 2009

    Another way for retirees to generate income from a vacation home is to sell it. By using the federal capital gains exclusion in conjunction with the sale of your primary residence, you can potentially realize tax-free income. Here’s how it works. The basic capital gains exclusion rules state that you must have owned and used the home as your primary residence for at least two years out of the five-year period ending on the date of the sale. If you are married, the full $500,000 exclusion ($250,000 for single homeowners) is available as long as one or both of you satisfies the ownership test (two years) and you both satisfy the use test (primary residence).

    Vacation Properties and Income – Part 1

    September 10, 2009

    If you have a vacation home, you’re already aware of the enjoyment it provides and the benefits it can offer at tax time. But you may not be aware of how vacation property can be used to generate income in retirement or how it can play into an estate plan. In fact, vacation properties offer retirees a number of different options in managing their finances and estate.
    Vacation property may be used to generate income in several different ways. The first, and most obvious, is renting it. The IRS allows you to deduct mortgage interest on your primary residence and one additional property up to a limit of $1 million in combined mortgage debt for mortgages taken out after 1987. Current tax rules also allow you to rent out a second home for up to 14 days per year without having to report the rent as income. If you rent for more than 14 days, the home is considered investment property, and rent must be reported as income. Converting the property to an investment property, however, allows you to deduct rental expenses, such as insurance and utilities, if you have a net profit on the property (deductions are limited if you report a loss). You can still use an income-producing property for personal use while maintaining your tax advantages — but only for the greater of 14 days or 10 percent of the total days it is rented. Maintenance days do not count as personal-use days, but use by in-laws or other part-owners does, even if rent is charged.

    Simple Truths

    September 8, 2009

    As a financial advising firm, one of the simple truths we have learned is that relationships are the single greatest influence on how people use their money and plan for the future. When people talk about their hopes and dreams, they talk about the people they love. Their future, the life they wish to live, is always full of the people most important to them. They don’t talk first about dollars and cents, Dow averages, or bond yields. They talk about a spouse, a parent, a child. When imagining their financial futures, even those without family often focus on others, such as employees, friends, faith communities, and charities.

    Keeping Your Emotions in Check…

    September 3, 2009

    In times like these, with the economy in a tailspin, and the stock market in the tank, investing requires an extra dose of patience, perseverance and perspective.
    It takes patience to ride out the bear market, perseverance to continue to invest even through a difficult economy, and perspective to see the long-term picture and realize that recessions and bear markets are just part of the natural economic cycle. Slumping economies and bear markets of the past have always turned around — and there is no reason to believe that this time will be any different.