Monthly Archives: September 2014

Weekly Market Commentary 09/29/14

The Markets

Last week offered some lessons in career management, economics, and investor impulse, among other things. Derek Jeter, the well-loved Yankees shortstop, finished the final home game of his career by smacking a game-winning hit. Throughout his last season, ticket prices for Yankees games soared on the secondary market with $16 bleacher seats selling for more than $200. By the end of the season, ticket vendors were asking as much as $11,000 a seat.

On the other coast, Bill Gross, renowned bond guru, did not retire. Gross left the firm he helped found for a smaller money manager. Shares of stock in his new company rose about 43 percent as investors anticipated the potential inflow of new assets. They also anticipated an outflow of assets from his old firm, according to Barron’s, which caused yields on Treasuries and corporate bonds to move higher on Friday, pushing prices south.

Gross’s shifting alliance wasn’t the only thing churning bond markets last week, however. Trepidation about global economic growth and geopolitical matters (e.g., Russia vs. Ukraine, etc.) had investors fleeing to “safe assets” earlier in the week. That pushed Treasury yields lower and prices higher. Barron’sreported:

“Thursday’s markets were all about a flight from risk, in part because of reports of a Russian draft law to confiscate foreign-owned assets in retaliation for Ukraine sanctions. More important is the message from “Dr. Copper,” suggesting weakness globally, whether in faltering Europe or slowing China. All of which suggests it will be an even more “considerable time” until the Federal Reserve raises interest rates.”

Volatility may be the name of the game for a while. Bloomberg suggested looking backward for guidance about the future. In 2013, Fed Chairman Ben Bernanke suggested tapering could begin sooner than expected. Treasury yields leapt by 1 percent as the market threw a “taper tantrum.” Just last week, Chairwoman Janet Yellen warned markets the Federal Open Market Committee statement was not a promise about the timing of rate hikes. Bloomberg said investors remained complacent. Apparently, they weren’t concerned unexpected economic strength in the United States could move the timetable forward.

At the end of the week, the Commerce Department reported economic growth was more robust than originally thought during the second quarter. The economy grew at the fastest rate in more than two years.

DO YOU HAVE WHAT IT TAKES? If you’re about 74 inches tall, have a deep voice, and have run a marathon, you may. The Economist’s recent article, Look of a Leader, found, “It is remarkable, in this supposed age of diversity, how many bosses still conform to the stereotype.” The article included a mixture of studies describing the characteristics of chief executive officers (CEOs) and other leaders:

  • 30 percent of Fortune 500 companies’ CEOs are 74 inches or taller (less than 4 percent of Americans are that tall).
  • Voice quality was more important than content when people were asked to evaluate executive speeches.
  • Male CEOs with the deepest voices earn $187,000 more each year, on average.
  • Companies with CEOs who had finished marathons were worth about 5 percent more, on average, than those with CEOs that had not.

Don’t worry. All is not lost. Those who have not been gifted with height, athleticism, and lower voice registers can give themselves a leg up by adopting power poses. Amy Cuddy, a Harvard professor (who delivered an exceptionally popular TED talk in 2012), has found non-verbal expressions of power dominance (body language) can influence other people’s perceptions and our own well-being:

“There’s one very important thing everyone should do before heading into a job interview, giving a big speech, or attempting an athletic feat… Everyone should spend two minutes power posing. What, you ask, is power posing? It is adopting the stances associated with confidence, power, and achievement – chest lifted, head held high, arms either up or propped on the hips.”

These poses can change body chemistry. High-power poses increase levels of testosterone and decrease levels of cortisol (a stress hormone), helping people feel more confident. Low-power poses, on the other hand, increase cortisol levels, causing people to feel more stressed. If you’re after an executive-level position competing with equally qualified candidates, power poses could give you an edge.

Weekly Focus – Think About It

“Your image isn’t your character. Character is what you are as a person.”
                                        –Derek Jeter, New York Yankee’s recently retired shortstop

* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
*Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
* Stock investing involves risk including loss of principal.

http://time.com/money/3052954/derek-jeter-yankees-farewell-tour-ticket-prices/
http://online.barrons.com/news/articles/SB52784017629588234037504580170200320391396?mod=BOL_hp_we_columns (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/09-29-14_Barrons-Bond_Kings_New_Realm-Footnote_2.pdf)
http://online.barrons.com/news/articles/SB52784017629588234037504580170133745626458 (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/09-29-14_Barrons-Dow_Off_1_Percent_for_Week-Footnote_3.pdf)
http://blogs.barrons.com/incomeinvesting/2014/09/25/long-treasuries-lead-in-risk-off-lurch/ (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/09-29-14_Barrons-Long_Treasuries_Lead_in_Risk-Off_Lurch-Footnote_4.pdf)
http://www.bloomberg.com/news/2014-09-24/yellen-warns-on-market-calm-before-considerable-time-up.html
http://in.reuters.com/article/2014/09/26/markets-global-idINL6N0RR3AP20140926
http://www.economist.com/news/business/21620197-getting-top-much-do-how-you-look-what-you-achieve-look-leader?fsrc=nlw%7Chig%7C25-09-2014%7C5356caf9899249e1ccc3d14f%7CN (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/09-29-14_The_Economist-The_Look_of_a_Leader-Footnote_7.pdf)
http://blog.ted.com/2012/10/01/10-examples-of-how-power-posing-can-work-to-boost-your-confidence/
http://investorplace.com/2014/09/derek-jeter-quotes/#.VCbFXUseW

Dementia and Divorce

My client Sarah called me the other day to tell me that her husband had the beginning stages of Dementia.  This was my client’s second marriage, as she had remarried a few years after her first husband died.  Before marriage, it was decided that both spouses would maintain ownership and control over their existing assets, but they never created a prenuptial.

My client has a substantial amount of money in IRA accounts and a small revocable trust.  Her new husband Craig has no liquid assets. He owns a home with a mortgage and approximately $50,000 of equity.  Upon marriage, Sarah paid off a substantial amount of debt that was in Craig’s name so they could lower their monthly bills. In exchange, her name was added to the title of Craig’s house.

Sarah told me that Craig has Dementia. Although he doesn’t want to discuss it, she realizes that it is getting progressively worse and is worried that she will need to either hire in home care or put her husband in a nursing home. She called me because she wanted to know if she would have to spend down all her assets in order to qualify Craig for Medicaid since they have no long term care insurance on Craig.

I referred Sarah to an elder care attorney in order to see what choices Sarah had available to her.  The three of us met and as we worked through her situation, it became clear that Sarah had two options.

Option 1: She could keep $119,000 of liquid assets and take the rest of her liquid assets and buy a Medicaid Compliant Annuity. The Medicaid Compliant Annuity would be annuitized upon purchase and give her an income in payments based on her life expectancy. Since my client is in her 70’s, she would get 10 years of payments at the most. And since we would have to take mostly IRA assets, the 10 years of payments would create a bigger tax situation than she currently is in, thus spending down her assets quicker. She also would give up all access to the principle – her only option will be to take the income check for the scheduled payments. Once the scheduled payments were done, there would be no more income. Since Sarah has several relatives in their 90 and 100’s, and Sarah has always been pretty healthy, there is a good chance that she may live to be a lot older than her life expectancy. If this happens, she would now be in a poverty situation herself. If her husband does need to go into a nursing home, we would have 2-3 months to buy the Medicaid Compliant Annuity – so she doesn’t need to do this unless the situation really happens.

Option 2: Divorce her husband and make sure that her assets go with her in the divorce. But, Sarah would not be able to make this decision when her husband is at the point where he needs a nursing home – she would have to make this decision in the very near future in order to make sure that he is mentally competent. When option 2 was presented, Sarah took a deep breath and looked at me.  “I have a lot to think about, don’t I?” I shook my head yes.

If Sarah had signed a prenuptial, it wouldn’t have protected her for Medicaid qualification but it would have if she decides to divorce in order to protect her assets.  While previously I’ve been able to work with elder care attorney’s to move assets into different type of trusts, the State of Michigan is currently in litigation regarding these trusts and most attorneys are advising against them due to the unsettled litigation.

My heart goes out to Sarah. Does she take the risk that she will live her own remaining years in poverty, or does she divorce her husband in order to protect herself? And since Craig is in denial about his Dementia, will he really understand that if she divorces him it’s for financial protection and not because she really doesn’t want a divorce? Will he try to go after her assets if she does choose to go that route?

So while Sarah has a big decision to make, it opens up a new set of questions for me, as a CERTIFIED FINANCIAL PLANNER™.

Over the last several years I have had several clients choose to have marriage ceremonies but not “legal” ceremonies. There have been several reasons that this made financial sense – the loss of pension income, medical insurance, alimony, etc. While there have been financial reasons in the past that were straightforward black and white, this situation is something completely new to think about.

If an individual can’t protect themselves by a prenuptial or trust in order to qualify for Medicaid, then more and more baby boomers should really take a hard look at purchasing long term care insurance before getting legally married, or not making it legal.  And while sometimes there are reasons to get married – the addition of higher social security income, pension survivor benefits, etc. – all factors really need to be looked at before you legally say, “I do.”

Couples also should really consider NOT combining assets into joint property. Since Sarah kept her assets in her name only, she has the ability to go the annuity route. If the assets had been in Craig’s name, she would not have the option to protect 100% of her assets.  Couples looking to remarry should also seriously consider having a prenuptial for a reason that they probably never considered – medical.

As if dealing with dementia wasn’t enough…

Margie Shard is a CFP and founder of Shard Financial Services, Inc., a financial planning and investment strategies firm in Fenton, MI. To contact Margie please call (810)714-5566 or margie.shard@shardfinancial.com. For more information on Shard Financial Services, Inc., please visit www.shardfinancial.com.

Securities offered through LPL Financial Member FINRA/SIPC.

Inflation: What the Fed Says and What American’s Experience are Two Different Things

The last several years have been tough for many people.  Grocery bills seem to have risen drastically, college tuition and books are at record levels, and child and health care continues to skyrocket.

Why all these things are true, why is it that the Federal Reserve – who controls interest rates – keeps reporting that inflation is barely at 2% most months? Surely, if that were the case then the above costs would only have gone up by 2% or less.

The Personal Consumption Expenditures Index (PCE) is the index that the Federal Reserve uses to measure inflation. The problem is that everyday people believe that inflation is much higher than it actually is because the way that the lower and middle class American’s spend their disposable income.  Items such as food, child care, health care, college, vehicle maintenance and repair have gone up, but other discretionary items have gone drastically down. [1]

Let’s look at the price of child care.  Child care has increased close to 20%.  On the other hand, personal computers have dropped by 80%! That 80% drop has a big effect on eliminating portions of the 20% increase in child care.

So while the Fed claims that inflation is near to under 2%, the reality is that most American’s feel a tighter monetary squeeze.  Since most American’s haven’t seen a real pay check increase in several years, the reality is that life isn’t any better for them since before the recession of 2007 hit.

The good news about the Federal Reserve using the low PCE value is that they have committed so far, to keeping interest rates low.  This is good for American’s to be able to afford to buy homes, automobiles, and other bigger ticket items.

The disadvantage of interest rates staying low is that interest bearing investments are continuing to have rock bottom rates of return. So American’s have to find other ways to invest their more conservative money in order to find a decent yield.  For retirees who live off their interest, it continues to be a challenge in order to find interest bearing investments that will produce adequate income without increasing a retiree’s overall portfolio risk.

So while the Federal Reserve can claim that inflation is low, the reality is that many American’s believe it is much higher. They feel it every day when they buy their food, drive their car, or pay the bill at the daycare so they can go to work.

Maybe it’s time that the Federal Reserve came up with a better indicator of inflation?

Margie Shard is a CFP® and founder of Shard Financial Services, Inc., a financial planning and investment strategies firm in Fenton, MI. To contact Margie please call (810)714-5566 or margie.shard@shardfinancial.com. For more information on Shard Financial Services, Inc., please visit www.shardfinancial.com.

Securities offered through LPL Financial Member FINRA/SIPC.