A Close Up of the 2014 Election Update

November 6, 2014

Dear Valued Investor,

The months of polls, punditry, and posturing are finally over. After months of uncertainty and waiting, the midterm elections are done, and there is a resolution.

As expected, the Republican Party regained control of the U.S. Senate and added to its majority in the U.S. House of Representatives. Although a few Senate races have yet to be decided, the Republicans control at least 52 seats—and  could control as many as 54. The important numbers in the Senate are 51, 60, and 67. The Republicans are over 51, which gives them a simple majority, but they are still short of the filibuster-proof 60, and far short of the 67 needed to override a veto, making sweeping legislative change unlikely.

Republicans made major gains, and the House has not been so dominated by one party since 1946. This is an interesting development, but does it mean that significant changes are on the horizon? Does change in the Congress mean change for you? Not really. The business environment might be slightly friendlier after the midterms, but I do not expect significant changes. 

The next key date in Washington, D.C. comes in mid-December 2014, when the continuing resolution to fund the government expires. The subsequent key date will be mid-March 2015, when the U.S. Treasury will hit the debt ceiling once again. At the margin, the Republicans’ control of Congress raises the risk they will demand concessions for passing a funding resolution for next year, or for raising the debt limit. However, given the backlash following last year’s government shutdown, as well as initial comments from likely Senate Majority Leader Mitch McConnell (R-KY), it is likely that Congress will avoid such a standoff.

Although major changes from the new Congress are not expected, LPL Financial Research is watching possible movement on several key legislative issues. Republican control of the Senate and House could have positive implications for energy and financial services companies by easing the regulatory landscape. For the energy sector, Republicans may be able to speed up permits for oil and gas exploration and gain approval for the construction of the Keystone XL pipeline, providing a potential boost to energy and industrial sector growth. Regulatory pressures on banks, including capital requirements, may be eased. Tax reform is possible, although more likely to happen at the corporate level than an individual level. And although Republicans will not be able to repeal the Affordable Care Act, changes to the law are likely, including the probable elimination of the medical device tax.

Clearly, elections have implications for policy and the direction of the country. Ultimately, however, LPL Financial Research believes stock market performance will depend more heavily on economic growth, corporate earnings, and valuations in the months ahead. In the end, these factors will weigh more heavily on the direction of stock prices than modest legislative changes. LPL Financial Research continues to believe these factors may support further stock market gains. 

Stay tuned for LPL Financial Research’s upcoming Outlook 2015 publication, for a closer look at policy considerations and the forecast on the economy, stock market, and bond market for investors next year.

As always, if you have questions, I encourage you to contact me.

Sincerely,

Chris

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

This research material has been prepared by LPL Financial.

The economic forecasts set forth may not develop as predicted.

Securities offered through LPL Financial. Member FINRA/SIPC.

Tracking # 1-326495 (Exp. 11/15)

Hope is Where the Heart Is

Often, it looks like the skies are about to fall when, in reality, some things are improving. About three weeks ago I looked at a newspaper showing headlines that the Justice Department had fined a very large US bank $19 billion for helping out the country in 2008 (remember that?) by ponying up to buy a defunct mortgage lender considered too big to fail. Another headline explained our jets were in Iraq shooting at US manufactured Humvees and tanks that were left there, apparently now mistakenly. They were being fired at with US-made missiles. I saw headlines on people in Ferguson, Missouri looting and burning down their own town. The Federal Reserve now thinks that low interest rates will stay around a really long time, another headline read. Is there a lot going haywire, or am I imagining this? It makes me wish for kinder, more predictable economic times.

It’s no secret that our markets are being propped up by the Fed’s low interest rate policy. But, they are learning as they go, too. Early last year they were set to raise rates late last year. Middle last year they were ready to raise rates early this year. Early this year they were ready to raise rates middle of this year. The spring of this year they were ready to raise rates at the end of this year. Now they are essentially just saying “We’ll let you know”. Go figure.

Now for some good news: The Day of the Speculator May be Waning

The 2013 rise in the market was amidst obviously questionable statistics not only based on their lackluster values (otherwise the Fed would have lowered interest rates already) but often on their dubious calculations (e.g. unemployment rate). Speculators went all in and did very well even amidst a market where about 70% of all trades are done in milliseconds by computers making buy/sale decisions based on microsecond inputs. Speculators got lucky. Now serious investors (not speculators) need to rethink their stock market positions.

The LPL Financial Current Conditions Index (CCI) as of late September indicates some pretty encouraging news. A quote from their September 24, 2014 report says “The CCI remains in the range of post-recession highs established after a recent spring bounce, signaling the US economy may be emerging from the modest, but steady, economic growth of recent years.”  This well-thought-out index shows the good and bad, as does information from the Bureau of Economic Analysis (BEA):

The Good

·       (CCI) stronger retail sales

·       (CCI) Decreasing stock market volatility (as measured by the VIX)

·       (BEA) GDP rose 4.6% in the second quarter

·       (BEA) New home sales recently rose 18.9%.

·       (BEA) Corporate profits increased 8.4% in the second quarter

The Bad

·       (CCI) Shipping traffic and commodity prices have recently decreased

·       (BEA) Existing home sales fell 1.8% in August

·       (BEA) Durable goods orders fell about 18% in August

·       (BEA) Initial jobless claims were up in September

General Observations

Last week U.S. Treasury bills and similar German bills, both of which are bonds, went negative on their yields. Investors were willing to invest a dollar and receive less back as their bond matured. This typically indicates a flight to quality from fear of a deeper loss.

The dollar has been very strong. This is somewhat of a double-edged sword. On one hand a strong dollar means that prices of goods and services that we sell overseas become more expensive. On the other hand, investment gains made in dollars help increase foreign investor returns in the US. Right now, the US dollar appears to be a relatively safer place to stash investment money than most other currencies on the planet. This can work dramatically to our advantage.

It is likely that equity assets are reasonably valued given future expectations. This, along with Fed policy goals, continues supporting our equity market. The Fed will remain on pins and needles looking for signs of inflation. Remember, the Fed’s mandates are full employment and price stability. It affects how fast they allow interest rates to return to a more normal level. To be clear, they have caused a distortion in asset pricing. The distortion needs to be corrected. Future earnings need to be there to support the high prices partially resulting from low interest rates. This appears to be happening, albeit in fits and starts. We also must allow for their actions having created an environment of higher risk taking.

These numbers change weekly and merit watching. They are not necessarily predictors; they simply indicate where we are.

With all of us in mind, it is imperative that investors, especially retirement investors, do not get caught up in the stock market hoopla. Well-thought-out decisions may not result in the highest returns, but they also may not result in highest losses.

I am optimistic for the equity market going forward.  With serious money, be careful; be smart.

Chris

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future.

This research material has been prepared by LPL Financial. 

The economic forecasts set forth may not develop as predicted.

Securities offered through LPL Financial. Member FINRA/SIPC.

May 30, 2014

May 30, 2014

Dear Valued Investor,

With Memorial Day behind us, school is ending in many parts of the nation and summer vacation destinations are a hot topic of conversation. But we were recently reminded of the significant impact the unusually cold and snowy winter of 2013–14 had on the U.S. economy. The Bureau of Economic Analysis of the U.S. Department of Commerce released revised figures on economic growth for the first quarter of 2014 as measured by gross domestic product (GDP). The GDP data are closely watched, as GDP is the broadest measure of the nation’s economic output. The pace of GDP growth is a critical driver of corporate earnings, which, in turn, are the key driver of stock market performance.

The GDP data revealed the economy contracted at an annualized 1% pace in the first quarter, just the second time since the end of the Great Recession in mid-2009 that the economy contracted. Could the first quarter GDP report be a harbinger of another wrenching recession? We don’t think the weather-related economic weakness is the start of another recession or even a slowdown in growth. We continue to expect that economic growth will rebound and expand 3.0% in all of 2014.* In fact, the return to a more normal weather pattern nationwide has already led to a sharp snapback in economic activity. The U.S. economic data released thus far for April and May 2014 suggest that economic growth will accelerate in the second quarter to well above the economy’s long-term average growth rate after a weather-induced slowdown in growth in the first quarter of 2014.

Importantly, many of the other indicators that can provide an early warning of recession are not signaling a downturn in the economy. The Index of Leading Economic Indicators (LEI)—compiled by the Conference Board—a private sector think tank—is comprised of 10 indicators and designed to predict the future path of the economy, with a lead time of between six and 12 months. The year-over-year increase in the LEI in April 2014 was 5.9%. Since 1960—652 months, or 54 years and four months—the year-over-year increase in the LEI has been at least 5.9% in 211 months. Not surprisingly, the U.S. economy was not in recession in any of those 211 months. Thus, it is highly unlikely that the economy is in a recession today, despite the below zero reading on real GDP in the first quarter of 2014. Looking out 12 months after the LEI was up 5.9% or more, the economy was in recession in just nine of the 211 months, or 4% of the time.

On balance then, we would agree with the LEI indicator that the risk of recession in the next 12 month is negligible at 4%, but not zero. However, a dramatic deterioration of the fiscal and financial situation in Europe, a fiscal or monetary policy mistake in the United States or abroad, or an exogenous event (a major terror attack, natural disaster, etc.), among other events, may cause us to change our view that the odds of a recession in the United States remain low. But for now, based on the LEI, it looks like we are still in the middle of the economic cycle that began in mid-2009.  

As we look forward to enjoying the summer sun, we continue to believe the foundation is in place for you to make further progress toward achieving your financial goals in 2014. As always, if you have questions, I encourage you to contact me.

* As noted in the Outlook 2014: The Investor's Almanac, LPL Financial Research expects GDP to accelerate from the 2% pace of recent years to 3% in 2014. Since 2011, government spending subtracted about 0.5% each year from GDP growth. Government spending should be less of a drag on growth which would result in +1% increase for 2014.

Sincerely,

Christopher Gerber, CFA

Phone: (952)230-1340

Fax: (866) 734-4311

Private Wealth Counsel of Minnesota, LLC

8000 78^th Street West

Suite 150

Edina, MN  55439

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Private Wealth Counsel of Minnesota, LLC does not accept buy, sell or cancel order by e-mail, or any instructions by e-mail that would require your signature. Information contained in this communication is not considered an official record of your account and does not supersede normal trade confirmations or statements.  Any information provided has been prepared from sources believed to be reliable but is not guaranteed, does not represent all available data necessary for making investment decisions, and is for informational purposes only.

This e-mail may be privileged and/or confidential, and the sender does not waive any related rights.  Any distribution, use or copying of this e-mail or the information it contains by other than an intended recipient is unauthorized.  If you receive this e-mail in error, please advise me (by return e-mail or otherwise) immediately.

Christopher Gerber, LPL Financial, and Private Wealth Counsel of Minnesota, LLC, do not offer tax or legal advice.  We recommend that you seek qualified tax and legal counsel before making tax and legal decisions.

Securities offered through LPL Financial, Member FINRA/SIPC

* As noted in the Outlook 2014: The Investor's Almanac, LPL Financial Research expects GDP to accelerate from the 2% pace of recent years to 3% in 2014. Since 2011, government spending subtracted about 0.5% each year from GDP growth. Government spending should be less of a drag on growth which would result in +1% increase for 2014.

 IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future.

This research material has been prepared by LPL Financial. 

The economic forecasts set forth may not develop as predicted.

Securities offered through LPL Financial. Member FINRA/SIPC.

Tracking # 1-277220 (Exp. 05/15)

The Prudent Man Rule and the Epiphany

I had a recent discussion with a marketing representative from a well-known investment management firm.  We were discussing allocation of money to "risky" assets versus "risk free" assets.  Risky asset refers to stocks or anything that does not have a creditworthy guarantee.  A “Risk Free” asset refers to an asset which in theory carries no risk of default and guarantees the return of principal and interest. However, there is not a practical “risk free” asset and all investments contain risk and may lose value. For our conversation we were kicking around zero coupon bonds as a surrogate.  He advocated putting the majority of investor money right now in risky assets.  I agreed that there is merit to stocks right now, but with reservations.  I explained that there is a context to each client portfolio. That context is life.

Prudent Man Rule

The Prudent Man Rule from an 1830 court case involved Harvard College. It states advisors to money were to “observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested." 

Further, they are to consider:

The needs of beneficiaries;

The need to preserve the estate;

The amount and regularity of income.

Those of you who know me know that I try to operate more like this than like our federal government that willfully squanders money on hot tips like Solyndra, and dubious billion-dollar projects. They spend money they did not earn.  Easy come, easy go for them. You, however, earned yours. Care and prudence means being careful rather than doing something just to be busy with the money in the absence of clear direction.  Managing it as I would my own has meaning. This isn't Congress. We have risk.

Last week’s data on how little the Dow Jones Industrial Average really made after inflation over the last 6 years (The Sidewinder) perfectly leads us to what is important about prudence and planning to retire and staying there once you are there. Our last six years can be likened to our version of the stock market between 1929 and 1935 in most ways. If you want to know what could have and still can happen ask your parents or grandparents what it was like growing up in the 1930s. The take-away is that an investor with a risk-on, pile it all in stocks strategy was barely rewarded. Certainly it was not enough to compensate for the risk he took. Life has no guarantees. The low risk investor likely made more than the high risk investor, but the numbers were not massively impressive. We were and are a sick, but improving economy.

The Epiphany

Investment decisions are made in the context of the real, actual, true, factual, correct, accurate, right, exact, spot-on, genuine goals.

  

Life sets parameters.  For someone retiring in the next ten years, or who is already retired, risk presents a problem.  If that investor’s personal economy spiraling out of control puts them back at the office when they should be retired, they are boxed in, exactly unlike what they envisioned.  Angst, worry, antihypertensive therapy, and another stupid boss are not part of the retirement plan. Let's look at context categorized.

How well you retire is based on five ingredients:

• How long you worked
• How much you saved
• How well you invested
• How much you will spend each month
• How long you are retired

I will look at the first one today and keep it coming over the next few weeks.

How long you worked: Social Security began in 1935.  Life expectancy was 66 1/2 years.  Typical retirees worked 45 years and retired 1 1/2 years.  The work to retire ratio was 30 years to one year or 30:1.  Assuming you work 45 years now, your life expectancy is about 85 years, so you will spend about 20 years in retirement.  The work to retire ratio is 1.8:1. YES, that’s less than 2:1! Social Security has made changes to accommodate this. Normal retirement age has increased. Special payout programs have decreased. Even the way that CPI calculates inflation has been used to lower payments. A recent study by John Williams of ShadowStats shows that if inflation was still counted the way it was before 1980, the CPI should be about seven percentage points higher each year than it is now. The average Social Security check would be about double what it is today. So, on average, you are working a lesser portion of your life, and you graduate from work with about half the Social Security buying power. You can work longer to increase your benefit. You can also alter the other four ingredients to help.

Chris

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance references are historical and are no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing in securities is subject to risk and may involve the risk of loss of principal.

The Sidewinder

The Sidewinder

What a confusing time. Thousands of headlines over six, yes SIX years. From Bernie Madoff to a 2013 blockbuster stock year we have had most if not all we could ask for. Throw in a war or two, some pension disasters, a few tax increases, and a government that has indicated by its financial behavior that it is fairly confused and you get, well, us. Whew! I need a breather, but not now. Let’s bring some CLARITY to the picture.

If you have been invested since year end 2007, and you measure the stock market by the Dow Jones Industrial Average (Dow), you are barely above zero after inflation. The Dow has been roughly trading sideways with a huge helping of volatility. This is calculated using the Bureau of Labor Statistics (BLS) own Consumer Price Index (CPI) calculator. It shows a TOTAL gain of 1¾% over the entire period, or 0.232% annualized and compounded.

Volatility has been beyond high. Measuring the intra year high to low is a “peak to trough range”.  Here, I use the S&P 500 for some comparison. The yearly ranges are:

2008: 49%,  2009: 51%,  2010: 29%,  2011: 19%,  2012: 23%,  2013: 36%

Average: 35%

Is it any wonder investors were a bit on edge? The volatility hit and just kept coming. Hence the inflows into bonds to offset the volatility increased dramatically. Bonds have price movement, too, to be fair. Volatility is typically much lower, and they pay interest along the way. They have been a nice diversifier in a very uncertain world.

Let’s review some numbers using the Dow Jones 30 Industrials including dividends as our stock measurement, and the bond index proxy of the Barclays US Aggregate bond index. You already know that the value of a dollar is fleeting. Inflation reduces it. So, I will also factor this in.

This graph shows the S&P Composite from the Schiller Fact Set. It has been a long, hard grind for stock investors, the WOW factor of last year notwithstanding.

      

                          Source: Schiller Fact Set

Taking away 2013 returns actually puts stock investors slightly behind 2007 after adjusting for inflation five years later! Even with this, my opinion is that going forward the positive outweighs the negative.

 

My Opinion on the Future

In my opinion, the investment markets generally rest on these legs:

Inflation: Fed would like to see some inflation. This would help it believe we have less chance of deflation, a worse plight. Their forward guidance suggests slightly rising interest rates in 2015. Labor earnings have started to increase. Average hourly earnings growth is up 2.5% over 2013 (Bureau of Labor Statistics). Fed likes this. It generally portends inflation and some inflation shows an improving economy.  I rate this positive.

Jobs: Joblessness reports are better…kind of. Neither I nor Fed is convinced. Looking harder at the numbers suggests that unemployment (U3) is down, but there are actually fewer hours worked per employee. One estimate from Edward Lazear, (Chairman of the President’s council of Economic Advisors 2006-9) suggests that we are the equivalent of down about 100,000 jobs from last September. U3 will never capture this statistic. I rate this negative.

Earnings: Record US earnings have been had for several quarters (S&P). Compared to 2007 earnings are slightly ahead after inflation. This is good news, especially their consistency.  Profit margin is great. Average S&P 500 margin is 21.5% (S&P). Corporate cash remains about 30% of current assets (S&P). This cash should eventually be better used in productive endeavors as management gains more confidence. I rate this positive.

Overseas earnings are more volatile and less predictable than those in the US. Parts of the world, including Europe are emerging from their financial depths. This leads to opportunities. I rate this positive.

Growth: US GDP growth is about 2.6% year over year. This is significantly below typical recovery growth. Its composition shows lower than average consumer spending and business investment. It is, however, positive. That’s a start. 2014 should have less drag. Consumption is increasing. Corporate capacity utilization is up very slightly from last year to 79.2% (Fed). We actually have a budget for the remainder of the year. Congress is overspending its pocketbook, but at least we now know by how much. Household net worth has actually peaked over that of 2007 even after inflation is factored in (BEA, Fed). Debt service as a percent of after tax income has fallen from 13.5% to 10% (BEA, Fed). I rate this positive.

I think slow growth while climbing the wall of worry is the order of the day. There is no question that there are several parts of our economy remaining hobbled. Regulation is stifling growth and rightfully causing management caution in business investing. Our medical delivery system has been largely changed via federal government authority.  Overall federal taxes have increased and we expect state taxes will, too. Public pensions have been grossly mismanaged and are a formidable expense. We are definitely not operating on all 8 cylinders. But, we are operating better than much of the remainder of the world. My experience tells me that value is relative, and we are relatively more valuable than our competition around the world, but there is value elsewhere, too.

It is time to talk. It is time to act.

Chris

Securities offered through LPL Financial, member FINRA/SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The opinions expressed in this material do not necessarily reflect the views of LPL Financial

“When You Come to the Fork in the Road, Take It!” Yogi Berra

                                                  The Scrambler at the MN State Fair

Trying Times, If You Like to Take Risks

I am told there are times that try men’s souls. I think they’re right. I also think that Ben Bernanke and Janet Yellen would heartily agree. I did a manual review of the volatility they and we have endured over the last couple of years. Through simple observation we have had these ten S&P 500 roller coaster rides in 2012-2013 and the average number of days it took them to happen:

The long, hard grinds up and the shorter, abrupt bungee jumps off the cliff make for enough volatility for a lifetime when we add the 2008-2010 circus. Can you imagine being on the Federal Reserve Board during this debacle?

Punching Bag

Fed likely has the finest information flow on the planet about most everything economic. It has scores of brilliant people to sift through all of it. Even with this advantage, its forward guidance has lacked accuracy. I won’t quite say Fed has been bewildered, but you get the idea. It truly has not been easy. We add the extra volatility knowing approximately 75% of all trades on the major market US Markets are by computer algorithms receiving information and making millions of trades in an instant, you have the ingredients for a short term nightmare. The short term, and I mean really short, dominates daily market activity while most individuals are investing for the long term. In the meantime, Fed continually takes the brunt of thousands of second guessers. Tough position. It continues its course, I think, because it knows its role is crucial to US economic survival in the same way we as investors know our roles are crucial to our financial survivals.

Understanding of the investor’s role in the market can be appreciated reading people like John Templeton, Ben Graham, Warren Buffet, and Bill Gross; all of whom have taken their share of punches, but did exceedingly well. They spent their lives trying to make sense of the markets. They each mention a large amount of luck, good or bad that influences everyone’s short term. Last year it was good. This year could be good or bad. Over the long term, however, logic is more likely to be in your favor. They may be able to determine what a stock should be worth, but they cannot tell you when it will be worth it. Future retirees are in the same boat in that they know they want to Be Done, but there is no longer a company run pension to take them there. I think this is especially appropriate to discuss now. We have had some relief from the debacle that essentially derailed finances in this country for the last six years. There may be a price to pay for the way we did it or it may turn out to be a stroke of genius. No one knows. What we know is that the country must review its current circumstances, make decisions, and move forward.

A Design for the Future

I have never heard of anyone willing to base his retirement on someone else’s whim. “If I win the lottery, if I get that inheritance, if I win Dancing with the Stars I will retire.”  Leaving it to chance just does not make sense. Instead, you purpose to make thoughtful estimates of what it will take to achieve your goal no matter what the Fed, politicians, or anyone else says or does along the way. This is called design. In the nowadays world of personal pensions, this is really, really important to focus on. It is also important to understand that unlike the pensions of the olden days, if you make a big mistake, no one will be there to write a check to shore it up.  A flaw in the design means it just does not work. We do not want that.

The Drill

Over the last thirty plus years of doing this and successfully retiring many, many people I have discovered several truths about successfully Being Done. Over the next few posts, we are going to drill down into what it takes to design and carry out your own pension successfully.

In the meantime, please feel free to contact us at (952)230-1340 to chat about this or any other thoughts or concerns.

Warm Regards,

Chris

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in this commentary may not develop as predicted. Stock investing involves risk including loss of principal. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors. The S&P 500 is an unmanaged index which cannot be invested into directly.  Unmanaged index returns do not reflect fees, expenses, or sales charges.  Index performance is not indicative of the performance of any investment.  Past performance is no guarantee of future results.

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