LJPR

Time 2020-11-12 13:06:09

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From July 19 25, SocialSecurity will celebrate its second National my Social Security Week. Activitiesacross the country will include email blasts, news articles, social mediaposts, posters and banners, registration events, and more!Why all the activity? Because apersonal my Social Security account is the most convenient way for people toaccess and manage their Social Security information online. Taking advantage ofthis convenient, cost-effective, and secure service allows workers to plan fortheir financial future and enables them to verify that their information on ourrecords is correct. This is important since earnings are the basis fordetermining the amount of future retirement benefits. For people who alreadyget Social Security benefits, my Social Security is the easiestand most convenient way to manage their benefits and get an instant benefitverification letter, change their direct deposit information, and much more. As of April2015, almost 19 million people have opened mySocial Security accounts. In fact, someone opens anew my Social Security account every six seconds. Join themillions and sign-up for your free mySocial Security account this week. It s the perfecttime to open an account and start planning for retirement or managing yourbenefits online. You can sign up today at www.socialsecurity.gov/myaccount.Markets: Global markets continued to send a mixedmessage through May and into June with signs of weaker global growth, combinedwith strong manufacturing numbers, modest acceleration in wage growth and goodjob numbers. The major points from our Outlookat the beginning of the year are still on target. Given the dollar/euro andlower energy prices (which help consumers like Europe), we ve recentlyincreased our allocation to a slightly stronger position in developedinternational markets including Europe. Thestrong dollar is a mixed blessing: it sgreat for imports and bad for exports.When we buy Saudi oil, we are getting a relative bargain. When we sell American goods abroad, they remore expensive. Given that analysis, webelieve the developed international markets are improving in terms of growthpotential. This growth is supported bylower local currencies and easy monetary policies, which should offset the dragof a continued stronger U.S. dollar. Greece:While no one can anticipate what the outcome will be regarding the situation inGreece (their debt issues and whether they will remain in the Eurozone), webelieve client portfolios are well positioned regardless of the endresult. As of this writing, the Eurozoneis working toward a deal before Greece s bailout program ends at the end ofJune when they need to pay the International Monetary Fund (IMF) 1.5 billioneuros basically money they don t have. The central bank in Europe is trying to strikea balance between safeguarding the country s central bank and keeping Greeklenders in business, which is providing the aid, while the Greek governmentveers toward default. By the time youare 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 theireconomy in global terms it is a little bigger than the state of Oregon. Should Greece default or exit the union, the initialreaction of the markets will likely be negative with expectations of a quickrecovery, barring any meaningful contagion fears. Our recommended allocationsare positioned adequately given our outlook for the remainder of the yearwhether a deal is worked out or not (if it hasn t by the time you are readingthis). We would view any pullback in the markets from a Greek default or exit fromthe Eurozone as a rebalancing and buying opportunity for the region as a wholeand would consider moving to an overweight position in developed internationalmarkets as the dust settles from the fallout. The situation there is constantlychanging and we are keeping a close eye on developments and will makeadjustments as conditions warrant.Oil: Energy has moved higher, off its lows when wehad moved to increase our dedicated exposure to the sector this has been apositive for returns. We continue toclosely monitor this area of the market.Our thesis at the beginning of the year, that lower oil prices wouldbenefit emerging markets, continues to do well on a year-to-date basis. Notsurprisingly, when oil prices are low, people use more (drive up I-75 on aweekend if you don t believe it). Demandis up, and the curve shows that demand is increasing at a more rapid rate thansupply. We think oil will continue torise in price, and geopolitical risks in the Middle East or Russia could acceleratethe price increase.Politics and Geopolitical Risk: LJPR soutlook for domestic politics and geopolitical risks has not changed. We expectcontinued gridlock in Washington to last at least through 2016. It appears thatclose to 20 people are now running for president, so investment in televisionads and/or earplugs might be useful. Russia,ISIS and North Korea continue to be the areas of concern and wild cards forpotential negative shocks to global markets. Cyber-warfare is starting toreally rear its head, and we will be working on a cyber-security seminar againin the future. Recognize thatgeopolitical risk is always there and maximizing diversification in portfolioscontinues 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 theconsensus within the investment community, even in light of the negative growthnumbers for the U.S economy that were reported for the first quarter of thisyear and the commentary from the Fed after their meeting this June. Once theFed does start to raise rates, there is a strong probability that the pace willbe slow and gradual. While there may benegative market reactions initially, similar to the last taper tantrum in2013, expectations of a rising rate environment are priced into the market andthe expected gradual pace should help to minimize downside risk; particularly tothose investments with interest rate risk exposure. Keep in mind, rising interest rates areultimately a positive for the U.S. economy meaning the economy is on solidfooting and growing along with a return to a more normalized interest rateenvironment. We ve shortened ourduration on our bond side, so we can take advantage of a rising rateenvironment.Our goal for clients is to make sure the fixed income sideof portfolios are adequately protected in an environment of rising rates. While we have never tried to time rateincreases or their magnitude no one knows with any certainty the direction ofthese variables (not even the Fed at this point), we do believe some minoradjustments to our target bond allocations were warranted by decreasing thesensitivity of portfolios to rising rates. Should market conditions orindications 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 ameaningful correction (10% or bigger drop).It s been almost 7 years since the last recession, a recovery periodthat is historically quite rare. Itseems obvious we will get a correction in some market, probably the US. It also seems immanent that we will have someform of slowdown. Here s a statisticthat we should all soak in. If you had aportfolio 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 bestdays 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 takeplace at the end of the day, so to dodge a bad day, you have to get out the daybefore the bad day. To get one of thebest 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 doesanyone else. So when the marketcorrects, we will rebalance. Historytells us to stay diversified and make adjustments to the mix, but also tells usto stay in. Happy summer!Leon and your LJPRLike a lot of investors, I watched the S P 500 Index do verywell in 2014, especially compared to holdings in small caps, international, andemerging markets. We own the S P 500 index as a holding and I'm happy aboutthat. However, Icouldn'thelp wonder how the S P did sowell. The pundits were decrying the death of active management, and new recordson the S P fell daily as the rest of logical investments sat relativelyidle. So, I worked out a trusty spreadsheet with help from friends at HighlandCapital, and deconstructed how the S P did. The results are startling: 36stocks 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 IndexCommittee. It's not-contrary to popular belief-the 500 biggest US stocks. TheS P 500 is based on market capitalization, so a big company occupies a muchlarger portion. Apple, for example, is one stock out of 500, or 0.2% of thetotalnumberof stocks, but it is 3.25% of theweightof the index. Apple's return has a very big effect on the overallS P return (more on this in a minute). WPX Energy is another stock in theS 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. SouthwestAirlines was the best performing stock in the S P 500 last year (low oilprices helped, and I suppose they save big on meals), but its only 0.11% ofweight of the S P, so it's 126% return only added .73% to the S P'stotal return.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? Weall know that diversification is key, but this review should be enlightening.You only needed 35% of theS P 500 to get all of your return, but which 35%? It reminds me of a storyattributed to John Maynard Keynes, who was asked how many stocks you needed toown. His response was "One". The interviewer then asked"Which one"? Keynes replied, "The one that makes the mostmoney." The interviewer then asked, "How do I find that one?"Keynes' famous response: "Wish I knew!" So for 2014, you may haveloved Apple, but you were really happy with Southwest Airlines (+126.3%). Youwere probably unhappy with Transocean (-59.9%). But if you owned the wholebasket, you owned them all. It's the concept of diversification: have parts ofthe whole world, and enough to make sure you own the winners.In a new show of bipartisanship,the lame-duck Senate finally passed the 'temporary' one-year extension of ahodge-podge list of about 50 tax provisions that had expired at the end of2013. The 'tax extender' package retroactively reenacts these tax deductionsand credits effective January 1, 2014,but they expire December 31, 2014.The House previously passed a two-year 'extender' package (which includedpermanent extensions of certain provisions) that, under a threat of a veto bythe President, went nowhere in the Senate. Instead, the House passed a one-yearextension last week and after some other important business (including fundingthe government) adjourned and went home for the holidays. Also wanting togo 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 isexpected to sign the bill into law this week.With two weeks remaining in 2014,individuals, families and business owners, along with their tax and financialadvisors can finally get to work planning their 2014 tax situations, largely bylooking in the rearview mirror. Cheers! Don't forget to save time for year-endholiday activities too!Most of these provisions werepreviously enacted temporarily, yet have been extended many times in one formor another, one or two years at a time. Some offer significant tax breaksto a very narrow constituency (quick expensing of NASCAR race trackimprovements and race horses) and others offer small benefits to a broaderswath of taxpayers (exclusion of up to $250 of classroom supplies purchased byeducators). Some offer tax breaks primarily to residents of certain states(deduction of sales tax paid instead of state income tax paid) or for thebenefit of retirees and charities (being able to donate IRA withdrawalsdirectly to a charitable organization).Some were first passed tostimulate the economy during one financial downturn or another (immediate writeoff of up to $500,000 of equipment purchases by businesses), but due to thefact that there is a very short time for businesses to actually plan for thisdeduction for the remainder of 2014, they may have limited economic stimulatingeffects going forward. Did the owner of the widget factory purchase that3D widget printer last spring because Congress might allow a juiced-up tax deductionor because her company needed it to keep up with the demand for widgets causedby an improving economy that was already happening? Other provisions wereimplemented to reward or encourage specific activities (tax deductions andcredits for college expenses or for the purchase of energy efficient property).Depending on which argument youbelieve in, each provision either cost the government billions of dollars ofrevenue or saves taxpayers an equal amount of taxes. The cost/saving of thisbill is projected to be $42 billion over 10 years. Regardless of the side youtake, there are no doubts these provisions and the question whether they willor will not be an ongoing part of tax landscape add to the complexity of thetax law and to the uncertainty with which individuals and businesses deal inplanning their financial activities.Of the many extended taxprovisions, those that have the most potential impact on our clients aresummarized below (listed in order of the section of the tax code that is affected):INDIVIDUALSDeduction for certain expenses ofelementary and secondary school teachersAllows a deduction fromadjusted 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 interestpremiums as qualified mortgage interestTreats mortgage interest premiumsas 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 salestax in lieu of state income taxTaxpayers may elect to deduct asan itemized deduction state/local sales taxes paid (either actual or amountdetermined based on income) instead of state income taxes paid. (This may bebeneficial to retired taxpayers who pay little or no Michigan income tax or residentsof a handful of states that do not impose an individual income tax).Above-the-line deduction forqualified tuition and related expensesProvides for a deduction fromadjusted gross income of qualified college tuition, fees, books, etc. of upto $4,000, depending on adjusted gross income and filing status.Tax-free distributions fromindividual retirement accounts for charitable purposesAllows tax-free distributionsfrom IRAs to charitable organizations of up to $100,000 per taxpayer ifat least 70 years old (a married couple may make tax-free distributions of upto $200,000). The amounts contributed in this manner cannot also be deducted ascharitable donations.Credit for purchase ofnon-business energy efficient propertyThis provision continues creditof 10% of the cost of certain energy efficient property (furnaces, waterheaters, windows, etc.). The maximum cumulative 'lifetime' credit allowedunder this provision is $500.BUSINESS TAXPAYERS (includingindividuals with small businesses)Bonus depreciationAllows for immediate expensing of50% of the cost of certain property and equipment placed in service during2014.Increased expensing limitationsunder Sec. 179/treatment of certain real property as Sec. 179 propertyAllows for immediate expensing ofup to $500,000 of eligible equipment purchases made in 2014; also allows forspecial treatment of certain real estate purchases as personal property(specifically aimed at retail and food-service businesses).There are many other provisionswith limited applicability to most individual or small businesstaxpayers. If you have questions about the items noted above or otherextended tax provisions that may affect your specific tax situation pleasedon't hesitate to contact us.This year, 2014, has been interesting so far. One majorasset class, large US equities, is doing very well, compared to most otherasset classes. That s great if you ownlarge US equities (and we certainly do!). Having other asset classes, likesmall cap stocks and emerging markets, can make it trying, since all we everhear about is the S P 500 or the Dow. Ever hear the commentator on the newssay, today the MSCI Emerging Market Equity Index was up 1.4% on lower oilprices ? 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 notthe only asset class. Small US equitieshistorically have outperformed large US equities. Can you name a large stockthat wasn t once small? Additionally, internationalequities provide valuable diversification and real estate is also a good assetclass. Although we can talk about it, itmay be just as easy to show, so here s a chart from JP Morgan:If you are correctly interpreting the chart, it shows the ninemajor assets classes (we use them all) and an asset allocation somewhat similarto ours. So in 2006, REITS, which wehave, did stellar (35.1%). In 2007, theywere the worst (-15.7%). In 2008, cashwas second best, and in 2009, cash was worst.Similarly, in 2008, emerging markets did terribly at -53.2%, followed bybeing the best performer in 2009 at +79%. The last column shows the annualreturn of each class. It s interestingto note that over 10 years, the asset allocation portfolio did just slightlyless 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 thechart, 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 tenyear period, and this holds for longer periods as well. That s the strategy ofasset allocation: don t try to hit theball out of the park, win the game. Andthe sweetener? Rebalance it so that youtake profits off the highest asset classes and buy more of the lowestperforming 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 thelong run.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.Unless you ve been on a beach without cell phone service (inwhich case, I envy you), the market is exhibiting a vast amount of volatilityand uncertainty. In today s world, wecan find explanations for everything.Amongst those is how the drop in oil prices and strong dollar arehurting the market, or that Europe is slowing (I hate to tell Europe, but theyhave been slow). We see the glasshalf-full, and not half-empty. Here sOil. Oil prices have tanked (down over 20%),which is bad for oil companies and good for everyone else (OK, it s bad forISIS, Iran, Iraq and most of the Middle East, but I m not overly concerned withtheir financial well-being). Low crude is a stimulant for the consumerand 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 corporateprofits.Europe. Most of the volatility centers around theinaction of Mario Draghi and the European Central Bank (ECB). The ECB hasbeen too tame in monetary policy, despite many verbal pledges to do whatever ittakes. This may be sending Germany into a recession, and Germany is thestrongest EU member. Greece suffered under the assumption that they maydefault on their debt. Not a bigsurprise since Greece was the first sovereign nation to ever default on theirdebt in 377 BC and has five debt defaults modern times. Spain has defaulted 13 times. Talk ischeap. The ECB has been talking but not doing. This leaves twooptions: they can keep doing nothing (which lets the economic marchcontinue), or they can do something (like Quantitative Easing). A QE typemove would probably be good for stocks in Europe. I d predict thepressure is on the ECB (and the Chinese Central Bank) to do something, andrather quick. economy. The budget is being cut,unemployment is down, and sentiment is up. Profits are not terrible, andconsumer spending is up along with industrial production. Strongdollar. The dollar is strong againstother 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 itshows. It also makes imports cheaper,and hurts foreign companies who sell in dollars, but build in other currencies(like Airbus or Swatch). So whythe volatility? I think a bunch of this is the market looking for anexcuse. A few days ago, I joked that the S P 500 was about to breakits 200 day moving average and that it would tank when theprogram tradeskicked in. It did. Ebola. Scary stuff.It s a horrible disease. Rightnow 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 andpneumonia, 576,691 died of cancer and 1 in 700,000 people were struck bylightning. I offer this as perspective. Factoidon elections. Interesting fact onmid-terms: since 1950, there have been 6 calendar years when a Democratwas in the White House and the Republicans controlled the House and theSenate. The average gain on the S P 500 during those 6 years was21.3%. What s our prognosis?Low oil is good. Strong dollar isgood. Fundamentals for the US lookgood. We believe in capitalism and freeenterprise. If you think owningbusinesses (stocks) is way to increase wealth, you are right. So volatility like this requires us to lookat the big picture and see if equities are actually vastly worse than they werea 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 advantageof the opportunity.you d like my commentary on the economy, markets and the elections, I ll begiving 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 politicaladvertising will decrease abruptly by November 4th (this one I msticking by). If you d like to join us,RSVP at events@ljpr.com or 248-641-7400. Space is limited.LJPR, LLC is a fee-only financial advisor and wealth management firm that specializes in financial planning, retirement planning, investment management, estate planning and tax planning. Located in Troy, Michigan, LJPR has been providing financial planning advice to the Detroit Metro area for over 20 years.Web: www.ljpr.comEmail: info@ljpr.comPhone: 248-641-7400LJPR, LLC4555 Investment DriveSuite 304Troy, MI 48098

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