Stocks finish the week higher as good economic data pushed the Dow Jones Industrial Average up 2.93%, and the S&P 500 up 3.75%.  Burger King Holdings Inc. agreed to sell itself to investment firm 3G Capital for $3.26 billion this week, giving the second largest U.S. fast food chain a chance to fix its business to close the gap with McDonald’s Corporation.

In economic news, consumer income and spending were both up in July as personal income rose 0.2% and spending was up 0.4%.  Consumer confidence was in August as the Conference Board’s index rose 2.5 points for the month to a level of 53.5.  Expectations were estimated at the 51.0 level.  The Institute for Supply Management’s manufacturing index came in at a stronger-than-expected level of 56.3 for a 0.8 gain from July.   The four-week new jobless claims average fell 2,500 to 485,000 after initial claims for the August 28^th week came in at 472,000.  Positive news came from the housing sector this week as the National Association of Realtors Pending Home Sales Index rose 5.2% in July to end a two month down streak.  Closing out the week, overall employment fell for the third straight month despite a gain in the private sector.  Overall payrolls fell 54,000 jobs in August as private payrolls were up 67,000 for the month.  Expectations were set at a drop of 90,000 and a rise of 40,000 respectively.

In earnings news, a very slow earnings week was highlighted as Borders Group reported disappointing earnings.  The U.S. book seller posted a quarterly loss of 74 cents per share, far worse than the expected loss of 13 cents per share. 

What opportunities are ahead?

When the recession hit in late 2008, companies around the globe had to tighten their belts and cut some of their capabilities and some ultimately had to file for bankruptcy.  During the same time, other companies were able to cut costs enough to survive the downturn.  Now that the economy is revving up, those companies that were able to survive the recession now have any even stronger position than they had before.

One sector that this is apparent is the semiconductor industry, where stronger companies were able to cut production significantly instead of working at full capacity while the recession was still going strong.  By doing this, many companies kept their inventories down and in turn, there was no extra supply for the companies to sell when the economy began to bounce back.

Now that the global economy is improving, consumers and companies around the world looking for newer devices, and virtually anything you can think of has a semiconductor in it.  From the computers we work on, to the phones we communicate with, to the cars we drive all have semiconductors in them.

In fact, the chairman and CEO of the world’s largest manufacturer of semiconductors, Zhongmou Zhang, forecasts the global semiconductor industry production value will grow by 22% in 2010, and another 7% in 2011, giving investors an opportunity to benefit for the years to come.

Market Returns

Next Week’s Economic Releases

September 6 – Labor Day – All Markets Closed

September 9 – International Trade, Jobless Claims

Stocks closed the week out lower as the Dow Jones Industrial Average fell 0.62% and the S&P 500 lost 0.66%.  A rally was ignited Friday as Fed Chair Ben Bernanke stated the Fed is not “impotent” and ready to defend the U.S. economy.

In economic news, existing home sales fell 27.2% in July to a 3.83 million annual rate for the lowest level since 1995.  Expectations would have placed the annual rate at 4.65 million for July.  Despite the extremely slow pace of sales, prices only were down 0.2% for the month.  New home sales for July also fell to a new record low as the annualized rate dropped to 276,000.  Durable goods orders also disappointed this week as new orders were up 0.3% for July, significantly below expectations of a 2.5% jump.  Better news came later in the week as jobless claims surprised on the upside as the new claims level rose to 473,000, well below the anticipated 495,000 level.  Gross domestic product also came in higher than expected as the, although low, quarter over quarter growth was 1.6%.  Expectations were set at a growth rate of 1.3% for the second quarter.

In earnings news, an extremely slow week was highlighted as Barnes & Noble disappointed as the specialty retailer reported a loss of $1.02 per share, well below the expected loss of 80 cents per share.  Burger King Holdings, on the other hand, surprised on the upside as the company posted earnings of 36 cents per share, 5.88% higher than analysts’ estimates.

What opportunities are ahead?

Investing in today’s economic environment can be very confusing.  Many investors jump around from investment to investment with little thought of the implications of the trades they place.  Without a sound investment strategy to follow many investors see returns that are inconsistent and surprising.  Since the most common reason for investing is to create a source of income by having money work for you, it is not in the investor’s best interest to have a portfolio that is scattered and unpredictable.

When developing an investment strategy, it is imperative to understand the tradeoff between risk and return for each individual investment and the effects it will have on the entire portfolio.  Although we all know the old disclaimer, “past performance is not an indication of future results,” there is no reason we cannot use historical information to give us an idea of how certain investments react in certain market environments and how they move in relation to each other in these environments.

Using certain tools, investors are able to perform a “stress test” on their portfolios.  Just like when you go to the doctor and they hook you up to a few machines and have you run on a treadmill, a portfolio “stress test” will also give you an idea of how your investments will hold up when it is under market pressure.  Using a Monte Carlo Simulation, which provides a sophisticated method to analyze the risk of your portfolio, you are able to see what you can realistically expect from your portfolio in many different market conditions.

After analyzing the information gathered by the Monte Carlo Simulation you should be able to reasonably predict the best, worst, and a median return that can be expected with its current allocation.  In addition to the possible returns your portfolio may return, the Monte Carlo can also give you information like the Sharpe Ratio, which is a measurement of the expected return per unit of risk, in other words, is the return you are expecting from good investment decisions or from simply taking more risk.

Without a sound investment strategy investors are often guilty of making emotional decisions that are not in line with their long-term objectives for their portfolio.  By developing a strategy and putting your portfolio through the ringers of a “stress test” you can give yourself the best chance of realizing your financial goals.

If  you or someone you know would benefit from having a stress test done, contact us for our complimentary Portfolio MRI.

Market Returns

Next Week’s Economic Releases

August 30 – Personal Income & Outlays

August 31 – Consumer Confidence

September 1 – ISM Manufacturing Index

September 2 – Jobless Claims, Pending Home Sales

September 3 – Employment Situation

Staying at Home

As the old saying goes, Home is Where the Heart Is.  One of the most preferred places for retirees to live is in their comfortable and familiar home, which is usually paid for.  However, factoring in the cost of vital services like health care and transportation, and more emotional factors like having a spouse or family member serve as a primary caregiver can make this one of the most challenging options.  In recent years products, such as reverse mortgages, have made living at home a little more affordable for retirees on a fixed income sources like pensions, social security and personal savings.

All in the Family

According to recent statistics, the typical caregiver is a 46 year old Baby Boomer woman with a college education who works and spends more than 20 hours per week caring for her aging mother.  The average length of caregiving last 4.3 years and typically lowers the caregiver’s life expectancy by 3 to 10 years.  There are many emotional and relational considerations when discussing this option, most likely resulting in compromises and coordination by both the elder and the caregiver.  Adult daycare and other community services can help ease these pressures.  One idea that can provide support to both the elder and the caregiver would be to rent out the elder’s home.  This strategy can provide tax benefits while preserving the value of the home for future needs or planned giving.

Retirement Communities

An increasingly popular option, retirement communities can provide independence, a sense of community with other seniors, and in some cases a total solution for future assisted and nursing care needs.  Costs for retirement communities can vary from a few hundred dollars to a few thousand per month depending on the type of community (non-profit, board and care, assisted-living, continuing-care, etc.), amenities, and experience of the staff.  In the case of continuing-care retirement communities (CCRCs), everything a senior could need is located under one roof, including a private room, various amenities and specialized health care.  CCRC’s operate more as a private senior club with entry fees ranging from $20,000 to $500,000 and caring monthly fees averaging $1,600 per month.

There are many different solutions to having the most fulfilling retirement imaginable.  The key, like any financial decision, is to have your goal clear in your mind and do the proper planning.  Let us help you develop your living plan that will endure throughout your retirement.

Key Findings from Caregiving in the U.S.  National Alliance for Caregiving and AARP, April 2004.

Stocks were down this week for the second consecutive week as the S&P 500 lost 0.70% and the Dow Jones Industrial Average was down 0.87% on the week.  Typically light summer trading volume and soft economic news can be credited for the slight decline.

In economic news, housing improved in July, but came in well below expectations.  Housing starts in July rose 1.7% for the month after an 8.7% decrease in June.  Overall industrial production also jumped back in July after the index of industrial production gained 1% in July, well above the consensus estimates of a 0.6% gain.  Unemployment numbers continued to disappoint this week as initial claims came in at 500,000 for last week, pushing the 4-week moving average to the 482,500 level, marking the highest level since December 2009.

In earnings news, Home Depot, Inc. posted slightly better than expected earnings this week as the home improvement retailer posted earnings of 72 cents per share, one cent higher than analysts’ expectations.  Wal-Mart Stores, Inc. also slightly beat expectations by posting earnings of 97 cents per share, 1.04% higher than expectations.  Deere & Company beat analysts’ expectations as the agricultural machinery maker posted earnings of $1.44 per share, 16.13% higher than expectations.

What opportunities are ahead?

The last several years have been a time of strife for many investors.  As the global economy began deteriorating in 2007, many investors flocked to save haven instruments to protect their portfolios.  These investments included money markets, certificate of deposits, and treasury bonds.  At this same time central banks around the world continued cutting benchmark rates to fight of a lasting recession, thus driving down any yield investors were able to pull together.

With the economy still struggling to gain its strength, many investors are growing weary of this low-yield environment and are beginning to look outside of the government bond space for return.  For many investors, this search has led them to high yield bonds. 

A high-yield or speculative bond is one that has been rated low by a rating agency due to its relatively high chance of default.  With this higher chance of default comes a higher yield, thus giving the less risk-averse investor a fairly high-yield, many times more than 10%.

Through the first eight and a half months of 2010, there have been over 350 high-yield bond issues, raising about $175 billion, almost double that of the same time period in 2009.

With central bank benchmark rates looking as if they will not be raised through the end of 2010, investors will continue to flock to high-yield bonds as a source of some return in their portfolios.

Market Returns

Next Week’s Economic Releases

August24 – Existing Home Sales

August 25 – Durable Goods Orders, New Home Sales

August 26 – Jobless Claims

August 27 – Gross Domestic Product, Consumer Sentiment

As the legal debate rages on in California about the right to marry, I wanted to address a common question in regards to titling of property, specifically the homes of married couples in California.  Ask an attorney, accountant or financial professional how to title your home, and you’ll likely get the dreaded, “It depends.”  While it truly does depend on your objectives and you should consult with an attorney prior to making any titling decisions, in California there are some potentially large tax differences between the two most common forms of ownership for married couples: community property with right of survivorship or joint tenants with right of survivorship.

While both forms of ownership transfer the decedent’s ownership share directly to the surviving spouse as an operation of the law thus avoiding costly probate, the similarities end at how they are treated for tax purposes.  The main difference lies in how the property’s tax basis is affect at the passing of a spouse.  When titling your home as community property with right of survivorship the surviving spouse receives a full step-up in basis on the property, while just the decedent’s share (50%) under joint with right of survivorship receives a step-up in basis.  This can be especially costly for couples owning highly appreciated property or older couples that have lived in their home for many years.

Please consult with your tax and legal advisor prior to making any titling decisions.  If you would like to review how your estate plan affects your overall financial plan, please call us and we’ll be happy to schedule a review.

Stocks were lower this week as the Dow Jones Industrial Average lost 3.29% and the S&P 500 fell 3.78%.  Stocks fell widely due to negative economic news.

In economic news, the overall U.S. trade deficit jumped to $49.9 billion in June from $42.0 billion in May.  The deficit jump in June was much larger than the expected rise to $42.5 billion.  The employment situation continued to worsen this week as initial jobless claims for this week came in at 484,000, much higher than the expected 460,000.  The 484,000 level marks the highest level since February.  Inflation rose for the first time in three months in July as the consumer price index rose 0.3% for the month, matching economists’ estimates.  July retail sales were up 0.4% month over month although analysts called for a 0.5% gain, indicating the recovery is slowing, but not weak enough to confirm at double dip recession.  Consumers are feeling better about the economy as the University of Michigan’s Consumer Sentiment Index increased to 69.6 for August from 67.8 in July.

In earnings news, Walt Disney Company beat analysts’ expectations Tuesday, as the worldwide entertainment company posted earnings of 67 cents per share, 15.52% better than the expected 58 cents per share.  Macy’s Incorporated also surprised this week as the retailer posted earnings of 35 cents per share.  Estimates were set at 29 cents per share.

What opportunities are ahead?

As the economic woes in the U.S. and abroad continue to take their toll on the stock markets we must also be cognizant of the effects it will have on national debts and therefore the strength of currencies around the globe.

Over the past 40 years, the U.S. national debt has grown from $370.92 billion in 1970 to an estimated $13.7866 trillion in 2010.  That is over 37 times growth.  GDP in the same time period has grown from $1.0383 trillion to an estimated $14.6239 trillion in 2010, or just over 14 times since 1970.  That means that over the past 40 years the U.S. national debt has grown at a rate of 264% faster than the U.S. economy.

The United States is not the only country seeing similar results.  Comparable trends have been seen in Europe, in particularly in Greece, Spain, and Portugal, all countries that have been cast into the spotlight recently.  As the national debt increases, these governments resort to printing more money and taking on even more debt just to stay afloat.  As more and more money is pumped into the economic system, the value of the currency diminishes and we enter an inflationary environment.

There are multiple ways to protect against inflation and currency weakness, including investing in gold.   Gold, unlike other commodities, has very few industrial uses, therefore can also be considered a currency.  And as a currency that cannot be printed by any government, consequently it is a currency of last resort.  So as the dollar, euro, or any other currency decreases in value, the price of gold will increase.

Market Returns

Next Week’s Economic Releases

August 16 – Housing Market Index

August 17 – Housing Starts, Producer Price Index, Industrial Production

August 19 – Jobless Claims

Our Nathaniel Ritchison, Certified Financial Planner™, recently collaborated on an article in the San Diego UT!

Carol Kenney, a local San Diegan, volunteered for a “Money Makeover”, sponsored by the newspaper and the San Diego chapter of the Financial Planning Association.  Nate was then chosen by the FPA to analyze Kenney’s financial situation and make recommendations.

If you missed this article published Sunday, August 8th, you can read it at the link below:

http://www.signonsandiego.com/news/2010/aug/07/newly-divorced-woman-is-planning-retirement/

Stocks finished the week higher as the S&P 500 gained 1.82% and the Dow Jones Industrial Average was up 1.79%.   This comes as the most recent jobs report shows the private sector is still wary of hiring employees.

In economic news, the Institute For Supply Management reported that its manufacturing index fell to 55.5 in July from 56.2 in June, signaling the manufacturing sector’s, who led the economy out of the recession, strength may be fading.  Overall U.S. personal income in June was unchanged over the previous month, keeping the year over year personal income at an increase of 2.6%.  Disappointing news came on Friday as the July jobs report showed weakness particularly in the government sector.  Nonfarm payrolls declined 131,000 jobs in July, much higher than the expected loss of 70,000 jobs.  Despite the disappointing news in nonfarm payrolls, average hourly earnings improved to up 0.2%, and the average workweek for all workers rose to 34.2 hours from 34.1 in June.

In earnings news, Oshkosh Corporation beat analysts’ expectations as the U.S. specialty vehicle manufacturer announced earnings of $2.31 per share, 20.31% higher than expectations.  Pfizer, Incorporated announced earnings of 62 cents per share.  Expectations were set at 52 cents per share.  Proctor & Gamble Company disappointed this week as the conglomerate announce earnings of 71 cents per share, missing analysts’ estimates of 73 cents per share.

What opportunities are ahead?

During the past three years or so we have been in a low yield environment.  With three-year treasuries yields at less than three percent and money markets yielding less than one percent.  Investors have been looking to other investments to give them some yield.  One of the best places to seek yield as of late has been dividend paying equities.

Shortly after October 2007, when the U.S. stock market peaked, an increasing number of companies started cutting back on expenses and slowed the flow of money to investments, and began loading their balance sheets with cash and increasing dividend payments to shareholders.

As the economy fights it way back to where it once was, many of these companies are keeping this structure in place.  In fact, 15% of the companies in the Russell 3000 increased their dividends in the second quarter of 2010, almost double the average.

With many companies yielding between six and eight percent, it is no wonder the investing public has been shifting their investments to these companies.  The financial strength of these companies, paired with their ability to continue to raise dividends as the economy improves; we will also continue to watch the price of these companies grow.

Market Returns

Next Week’s Economic Releases

August 11 – International Trade

August 12 – Jobless Claims

August 13 – Consumer Price Index, Retail Sales, Consumer Sentiment

Stocks ended the week mostly unchanged as the S&P 500 lost 0.1% and the Dow Jones Industrial Average gained 0.4% on the week.  July became the best performing month in over a year with the S&P 500 and the Dow Jones Industrial Average both rising nearly 7% for the month.

In economic news, consumer confidence dipped again in July over worries of the jobs picture as the Conference Board announced the consumer confidence index fell to 50.4 in July from the 54.3 reading in June.  Durable goods orders also disappointed in June as the new orders slipped 1% month over month, estimates were set at a 1% boost.  The big news came on Friday as second quarter GDP came in at an annualized 2.4% growth.  Estimates were set at a 2.5% quarter over quarter annualized growth.

In earnings news, Aetna Inc. beat analysts’ estimates of 74 cents per share by posting earnings of $1.05 per share.  Lockheed Martin Corporation also beat expectations this week as the Maryland-based global security company reported earnings of $1.96 per share, 10.11% higher than analysts’ expectations of $1.78 per share.  Las Vegas Sands Corporation beat analysts’ expectations by 88.89% after posting earnings of 17 cents per share; estimates were set at 9 cents per share.  About 75% of the roughly 300 companies in the S&P 500 that have reported earnings so far have beat expectations.

What opportunities are ahead?

Friday’s gross domestic product number missed expectations with a 2.4% annualized expansion rate, showing U.S. economic growth slowed for the second quarter of 2010.  Although these numbers prove economic growth has been a little tepid, the importance of the GDP number lies in the fact that this is the fourth straight quarter of growth for the U.S. economy since the end of our most recent recession.

 When looking at GDP and its effect on the investments investors choose, it is important to understand the different stages in an economic cycle.  The four major stages of an economic cycle include:  slowdown, recession, recovery, and expansion.  Each of these four also includes their own phase including early, middle, and late stages.

As investors, we need to be able to identify which sectors are the best to invest in each phase of the economic cycle.  Taking into consideration that we have had four straight quarters of economic growth, it is safe to say that we are in the economic recovery stage of the cycle.

Since most economies are driven by consumer demand, this is where most of the economic growth will come from during the recovery stage.  The consumer discretionary and the retail sectors are historically both places where investors see growth during this stage of the cycle.

Thinking towards the future, we must also be able to identify what investments tend to outperform in the next stage of the cycle, economic expansion.  During the expansion phase, GDP has started to grow at a robust pace, of approximately 4-6% quarterly growth.  In this stage, companies see a recovery in their revenues and profits.  This sparks investment in large infrastructure projects and longer-term assets like machinery, computers and other capital goods.  In this phase of the cycle investors tend to see growth in the industrials, materials, and semi-conductors sectors.

Having an understanding of where an economy is at any given time can be a great way for investors to have a better idea of where there investments should be.  Although the length of each cycle and the length of each stage of the cycle vary, using certain economic indicators, such as GDP, can be a way that investors can identify certain sectors to look deeper into when choosing an investment.

Market Returns

Next Week’s Economic Releases

August 2 – ISM Manufacturing Index

August 3 – Personal Income and Outlays, Pending Home Sales

August 6 – Employment Situation

Stocks closed higher this week as earnings continue to surprise on the upside.  The S&P 500 gained 3.55% on the week as the Dow Jones Industrial Average gained 3.24%.  The biggest news of the week came Friday as the Committee of European Banking Supervisors announced the results of the evaluations they conducted on European banks.  The “stress tests” did not seem to be very “stressful” after only seven of 91 banks failed the test.

In economic news, home builders reported the weakest conditions since April 2009 on Monday as the housing market index fell to 14 in July, down two points from June.  Housing starts declined 5% in June to an annualized level of 549,000 starts, showing a total decline of nearly 20% over the last two months.  Existing home sales also dropped in June, but not as much as expected.  Analysts’ expected a drop to 5,260,000 annualized sales, while the actual drop was to an annualized 5,370,000 sales, a 5.1% decline for the month.  Jobless claims also disappointed this week as the new claims level jumped 37,000 to 464,000.  Economists’ estimates were set at 450,000.  

In earnings news, Halliburton Company beat analysts’ expectations as the Texas-based energy industry service provider posted earnings of 52 cents per share, 40.54% higher than the expected 37 cents per share.  Apple Inc. also surprised as the company reported earnings of $3.51 per share, estimates were set at $3.12 per share. 

What opportunities are ahead?

In October 2009 the United States Consumer Price Index switched over from a deflationary environment to inflationary environment.  Although the current rate of 2.3% is relatively low, recent government spending paired with massive current government deficits may make it necessary for the U.S. government to start printing money to pay back its creditors.

With the inevitability of the printing presses starting up in the future, there will also be some increasing downward pressure on the purchasing power of the U.S. Dollar.  There are many ways to hedge against this rise in inflation, including the most obvious choice, TIPS.

TIPS, or Treasury Inflation-Protected Securities, are treasury securities that are indexed to inflation in order to protect investors from the negative effects of inflation.  Since TIPS are backed by the U.S. government, they are considered an extremely low-risk investment.  All TIPS have a fixed interest rate attached to them, just like any other treasury bond, but as the Consumer Price Index rises, the par value, or the face value of the bond, also rises.

Since both the coupon payment and inflation-based adjustments to principal are federally taxable as ordinary income, buying Exchange Traded Funds, or ETFs, that hold TIPS is the best way to invest in the security.  The ETFs will also allow you diversify at a higher level than individual TIPS that you purchase directly from the government.

Although we are in a moderately low inflation environment currently, it is only a matter of time before the U.S. government will have to starting printing money, thus raising the rate of inflation.  Using TIPS can protect you from the loss of purchasing power in the future.

Market Returns

Next Week’s Economic Releases

July 26 – New Home Sales

July 27 – Consumer Confidence

July 29 – Jobless Claims

July 30 – Gross Domestic Product, Consumer Sentiment