Bond Market Outlook: Points to Ponder

June 6, 2012 — Sam H. Fawaz

During the past decade, many long-term fundamentals of investing have been turned upside down and one example is the performance of U.S. stocks compared with bonds. Over longer time periods, such as 20 or 30 years, stocks exhibited higher average annual returns along with greater volatility.1 Bonds, in contrast, presented lower long-term returns along with fewer ups and downs.

But the 10-year period ending December 31, 2011, has shown the opposite, with the average annual return of investment-grade bonds exceeding stocks by a margin of 5.8% compared with 2.9%.1 No one knows for sure whether the recent outperformance of bonds will continue, but events currently present in the U.S. economy are causing observers to question the outlook in the years ahead.

Interest Rates The Federal Reserve has maintained the federal funds rate between 0.0% and 0.25% with the goal of stimulating the economy. Given how low short-term interest rates are, it is likely that they will turn upward at some point, which would present challenges for bondholders. Historically, higher interest rates have caused the prices of existing bonds to fall as investors have pursued newly issued bonds paying higher rates. This scenario presents the potential for losses for existing bondholders.

Inflation During 2011, inflation averaged 3.2%, close to the historical average of 2.9%.2 But if inflation were to increase even higher, an investor would lose money on a bond with a yield lower than the rate of inflation. Some observers believe that if the U.S. economy begins generating stronger growth, inflation could once again spike upward.

Federal Spending Sizeable federal deficits are almost old news as the government looks for ways to stimulate the country’s economic engines. While economic growth is a laudable objective, outsized federal spending may impact the financial markets. If the federal government is forced to pay higher interest rates to entice investors to fund the debt, this action could lead to higher interest rates on other types of bonds as well in response to investor demand.

Bonds can help investors balance a portfolio weighted to stock funds or other assets. When making decisions about investments, it is important to weigh both the benefits and the risks associated with bonds and any other assets that you own.

Source/Disclaimer:

1Sources: Standard & Poor’s; Barclays Capital. Stocks are represented by the Standard & Poor’s 500 Index, bonds by the Barclays Aggregate Bond Index, volatility by standard deviation. Results are for the 30-year period ending December 31, 2011. You cannot invest directly in an index. Past performance does not guarantee future results. Investing in stocks involves risks, including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.

2Source: U.S. Bureau of Labor Statistics. Inflation is represented by the Consumer Price Index. Historical average is for the period between 1926 and 2011.

June 2012 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by YDream Financial Services,a local member of FPA.

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What’s Going on With The Markets? 3rd Quarter 2011

October 1, 2011 — Sam H. Fawaz

The headline on today’s Wall Street Journal says it all: “Stocks Log Worst Quarter Since ’09”, referring of course to the first quarter of 2009 before the start of the (current?) bull market run. Even quarter-end “window dressing”, where fund managers buy up the best performing stocks to make their holdings look good to shareholders and boost their chances of quarterly performance bonuses didn’t help at all. September 30th ended the day, week, month and quarter-end at an ominous level.
 
The shocks to the markets continue to come from the Eurozone debt crisis, worries of another recession starting, the Chinese economy slowing, and now, corporate earnings results for the third quarter coming in below estimates. Forward guidance, that is, how companies estimate their upcoming earnings, are expected to be pulled down a bit. With economic data continuing to soften or come in worse than expected, evidence is mounting that the economy continues to slow down, but not contract. Contraction for two straight quarters is the textbook definition of the start of a recession.
 
My most reliable source for forecasting a recession comes from the Economic Cycle Research Institute (ECRI). In the past, they have been spot on in identifying the conditions that precede the onset of a recession.  This week, although not confirming the start of a recession, the ECRI did confirm that evidence of a recession is spreading like wildfire and one would be almost impossible to avoid given current conditions.  Consumer confidence is at or near an all-time low due partly because of the whole debt ceiling debacle and political gridlock. Without confidence, and without jobs, people are not spending to help the recovery. Without spending, there’s no demand. Without demand, there’s no production and therefore no hiring. And you can complete that circle yourself.
 
As I’ve mentioned before, if we are headed for a recession, then stock prices will likely have to fall further before they are fairly priced. This is because earnings fall during a recession, and institutions only buy stocks when they’re fairly priced according to forward earnings. If we’re not headed for a recession, then stock prices are cheap and out to be bought hand over fist right here, right now. 
 
What we’ve witnessed in the stock markets over the past 8-9 weeks is extreme volatility brought on by the battle between those in the recession camp and those not in the recession camp (along with Eurozone worries).  Since the August 9th low in the markets, the S&P 500 has traded in a 100 point range and has basically gone nowhere.  This bouncing around will not continue forever (but can continue for months), and will give way to a big move up or down in the near future. The action during the past week tends to point to a downward move, but every downward move in this range looked like it was going to break down until buyers stepped in.
 
What I Believe and What We’re DoingAs evidence that points to a recession mounts, I’m becoming less convinced that we can avoid a recession in the next 3-6 months. This is a change from my previous stance of no impending recession in previous months. It’s become increasingly clear that the Federal Reserve is less able to influence what happens in the economy, and in my opinion, the less they do the better.
 
As the odds of a recession have been increasing, and world economies also slow, I have been slowly reducing client exposure to equities over the past couple of months. Our exposure to small cap stocks is now very small, and I began to reduce exposure to mid-cap stocks by up to 1/3 as of last week.
 
On Friday of this week, I increased our exposure to hedges via leveraged inverse exchange traded funds because I believe that we will test the August 9th low on the S&P 500 index of 1101 (current level of support) and may even break below it. I also believe that even if the market did decline by another 10% (should we break support) we still have a year-end rally in the cards.  Even if I’m wrong about reducing equity exposure and increasing our hedges, and the markets reverse and fly to the upside (not likely), prudent risk management based on the facts and circumstances warrant caution. It never hurts to reduce equity exposure when uncertainty and volatility rule the markets.
 
September 2011 was the 6th down month in a row in the stock markets, and bear markets typically last 6-18 months. If this is merely a correction and not a bear market, then 6 months is a good point in time to expect a bounce. My expectations, especially since this is the 3rd year of an election cycle, that somewhere along the lines of mid to late October, we begin to see the year-end bounce. 
 
As always, I offer my caveat: my crystal ball is in the shop and no one, including me, can forecast what the markets will do. I can only provide my best guess, and that’s what this is, a guess, based on all the information available to me and historical precedent, of what the markets may do. I could be totally wrong on both direction and timing, so no one should make any investment decisions based on my prognostications or forecast. Forewarned is forearmed.
 
I’m happy to answer any questions or comments you may have. If you already have a fee-only financial advisor (the only kind I recommend), then great. If you’re looking for an unbiased, fee-only financial advisor, don’t hesitate to contact us. Your first consultation is complimentary and comes with no pressure to act or sales tactics.  As fee-only fiduciary advisors, we act in your best interest and collect no commissions, trails or any hidden compensation.

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Stock Market and Economic Update August 21, 2011

August 21, 2011 — Sam H. Fawaz

The past week hasn’t been particularly kind in the stock markets as we saw little follow-through on the previous week’s rally. My upside target of 1230-1260 in the S&P 500 index was not even approached before selling resumed at around 1208.
 
A few economic reports from last week have me a bit more concerned about the possibility of a recession within the next twelve months.  Although the economic leading indicators that I’ve come to rely on from the Economic Cycle Research Institute turned up again this past week, the only components to rise were financial ones, namely the money supply (with the stock market selling being a contributing factor) and the steep yield curve (ultralow interest rates on short duration debt versus higher rates on longer duration debt made possible by the Federal Reserve’s low interest rate policy). Without these two components, the index would have been down 0.5%, which is down three of the last four months.  Weekly unemployment claims came in at 408,000 whereas they were starting to trend below 400,000 in the last few weeks.
 
So the volatility in the market right now is at least partially attributable to concerns about whether a recession is on the horizon or not. If one is not, then the market is undervalued. If one is, then the market is overvalued. So far, the weight of evidence of a recession is still inconclusive, but it appears that institutional buyers are starting to “discount” that possibility as they demonstrate through selling in the markets.  The research I read is split about 50/50 about whether a recession is coming, with convincing cases made on both sides.  My feeling is that we have a bit further to go on the downside if economic factors or confidence measures don’t start pointing up real soon.
 
Accordingly, I am becoming increasingly concerned about the behavior of the markets and the economic numbers coming out lately since they haven’t been particularly encouraging. Accordingly, this past week I increased my clients’ hedges and continued to slightly reduce exposure to equities just to be on the safe side. 
 
This week will be critical since the Federal Reserve Chairman (Ben Bernanke) will be speaking on Friday and will reveal any further measures they may take to ease recession concerns and restore confidence to the markets.  More information about how the Eurozone will handle its debt crisis should help calm the markets.  But based on the market action on Thursday and Friday, it seems that many institutional and retail investors are not waiting to hear what the Chairman has to say or what solution the Eurozone might propose to avoid a deepening debt crisis.  They have therefore been selling and may continue doing so into this week.
 
I will continue to monitor the markets day to day and make further adjustments to portfolios and increase hedges as conditions warrant. Since the market is heavily oversold, we should expect some level of a bounce this week, if only for folks to prepare for any surprise announcement the Federal Reserve Chairman might offer to help propel markets higher.

Bottom line, it’s too early to reach conclusions about whether or not the April high was an important top in the market. If it was, it was unlike any market top of the past 50 years, with both the LEI and market breadth still hitting new highs after the top. When panic selling spreads across the board – good quality companies go down along with the overvalued speculative stocks.  I can say that barring some type of financial Armageddon, I believe the downside valuation risk in this market is far less than in 2007-08. 

My major equity allocation decision is to give this market more time before making any major adjustments. What is needed –more than anything else– is stability and confidence. Only time and stability can calm the emotional extremes and fears, which still come out of the woodwork on a daily basis. But as I’ve said, if the retest (of the S&P 500 index lows of 1100) is able to hold above the lows of last week, then it could provide a strong market base if evidence of a recession does not increase in coming weeks.

Again, please do not take this message as advice to buy or sell any securities; please consult with your investment advisor (or us!) This message is not intended to forecast what will happen in the market since no one (including me) can do that. My objective is to share what I’ve been hearing, reading and researching, the end result of which is one of cautious optimism.
 
Please don’t hesitate to contact me if you need any help with your personal financial situation or investments.  I welcome your feedback and questions always.

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Why I Don’t Trust This Rally

August 15, 2011 — Sam H. Fawaz

We finally strung together three up days in a row in the stock markets today and that’s a good thing. Volatility is ratcheting down and folks are stepping in to scoop up bargains.  Unfortunately, for the first time since we bottomed back in March 2009, I don’t trust this rally and believe that we are headed back to test last week’s low of 1,101 on the S&P 500 index in the short term.  If the market doesn’t hold at that level, our next stop is likely 1060. Let me explain why this rally has a lot to prove before I believe that this correction is over:
 
1.  Other than relieving an oversold condition, not much has changed fundamentally between last week and today. Uncertainties are abound about the possibility of a recession starting or already started (which I don’t believe), how we’re going to deal with raging federal deficits, and the Eurozone debt crisis. A meeting between German and French officials tomorrow will shed some light on how they will deal with the debt crisis in Europe.
2.  The three day rally that began last Thursday has occurred on light volume, reflecting very little institutional participation.  Institutions often wait for retail investors to bid up the market after a severe selloff to set it up for more selling.  The selling has been coming in on very heavy volume while buying is coming in on light volume, a bearish sign.
3.  Consumer confidence, as measured by the University of Michigan survey released last Friday, was at a record low.  These levels have not been seen since the great recession (but do reflect the recent anxiety over the recent U.S. debt ceiling debacle and stock market sell-off last week).
4.  The main stock market sentiment indicators showed an increase in bullish sentiment last week. This is considered a “contra” indicator. After the recent stock market beating, there seems to be more complacency than fear in the markets. Folks are still in “buy the dip” mode. They might have buyer’s remorse if they’re short-term holders.
5.  The kind of technical damage to the markets caused by last week’s sell-off takes weeks, if not months, to repair.  After-shocks and re-tests of lows are the norm after such a severe sell-off.
The positives that point to a better economic environment and stock market include a better than expected weekly jobs report last week, improved July retail sales figures, good corporate insider buying, and more big corporate mergers announced today.
 
While I believe that the markets could bounce for a few more days, unfortunately, I feel that we are headed lower over the short-term. The S&P 500 index closed at 1204 today, and we may even climb as high as 1240-1260 before the markets “roll over”.  That is 3-4% from here, and it’s only an educated guess on my part since 1250 is approximately where the markets fell apart.  I’d like to take advantage of this short-term rise, but only if more volume confirms the move higher.  Otherwise, it’s easy to get whip-sawed in this low volume environment. 
 
This is why I continue to hold onto hedges and have refrained from putting available cash to work at this point.  I’ve continued to selectively cull positions and rebalance accounts to take advantage of the recent strength in the market. Nonetheless, we remain heavily weighted long in the equity and bond markets despite our cash and hedges.  If the S&P 500 index closes above 1290 convincingly, then I’ll re-evaluate my stance, consider pulling in my hedges and invest more cash.
 
But aren’t we investing for the long term? Why should short-term market dynamics control our investing decisions? While we do invest for the long term, it’s prudent to protect capital when the market is in a well-defined downtrend, especially when a near-term recession is a possibility, albeit a remote one.  Markets around the world are factoring in a global slowdown, and the U.S. won’t be immune.  Sure central banks may pull a rabbit out of their hat and stimulate the economy and markets once again, and I’ll be ready for that.  But for right now, unless I see some institutional “power” behind this rally, I just don’t trust it.  As I’ve mentioned before, I expect near-term market weakness until sometime in October.
 
No part of this message should be considered a recommendation to buy or sell any securities, and you should not act on this without consultation with your financial planner or money manager (better yet, talk to us!)  My position will change if the facts change, so I am not married to this position. That could be tomorrow, next week or next month. I don’t have a crystal ball, so my prognostication should not be taken as true fact (I could change my mind or worse, be wrong!)
 
Please let me know if you have any questions, concerns or feedback. I’d love to hear what you’re thinking.

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What’s Going on in the Markets-August 4, 2011

August 4, 2011 — Sam H. Fawaz

I probably don’t have to re-hash for you what’s been happening in the markets over the past couple of weeks as we’ve suffered what feels like the worst decline in the markets since they recovered in March 2009. The media does a pretty good job of instilling fear and I don’t expect the newspaper headlines to be happy ones on Friday morning. So let me give you my take on what’s going on and what I’m expecting.

Coming into this week amid the uncertainty over the passage of the debt ceiling vote in Congress, we had already endured about seven days of selling in the markets that seemed to pick up steam on Monday. The euphoria on Sunday evening over a possible debt deal in Congress was over within minutes of Monday’s market open and the selling began in earnest. So what gives? If a deal was such a good thing, why did the markets sell off on the news and passage of the increase in the debt ceiling?

In reality, the significance of the debt ceiling vote was elevated by the media, and while it added to market anxiety, many were actually more concerned about the signs of slowing in the economy. The usual concerns over jobs, housing, spending and overall goverment regulation of business have been weighing on consumer and business confidence for a few months now. Downward revisions in the gross domestic product for past and future quarters haven’t help encourage companies to hire or spend on capital improvements. Once the focus was taken off the debt ceiling issue, the economic concerns were brought to the forefront.

Another Recession Already?
You’ll hear talk in the media about whether we’re heading for another recession this year, whether we’re already in a new recession or whether the recession never ended. As for the last two assertions, the economic statistics simply don’t support the notion that we’re in a recession. As for whether we’re heading for another recession in 2011, so far, the economic statistics don’t support that either (though some unfortunate members of the unemployed or those under water on their mortgages may not agree.) While we’re seeing a slowing of economic output, hiring and capital spending, we have not seen any evidence of negative or no growth. Could we see one in 2012? Anything’s possible, but no one can predict this; not even me.

My take on all this is that while the recovery has been anemic, I don’t believe that we’re heading for a recession this year. While I’m no economist, the Japan earthquake, Eurorpean and U.S. debt “crises” and other weather related factors have really thrown 2011 for an economic loop. When you consider that fiscal stimulus takes 18-24 months to make it out of the capital markets into capital spending, we may just be experiencing a temporary slowdown in growth.

As an example, commercial traders of lumber futures deny a slowdown in demand, and that usually doesn’t happen if a recession is around the corner. Corporate profits are at record highs (thanks to a dearth of hiring) and many are raising estimates of earnings for the next quarter. Credit is cheap and readily available, and companies are buying other companies and their own stock back at record levels. With the Federal Reserve on the side of the consumer, you’d be hard pressed to bed against them. So I believe that reports of an impending recession may be a bit exaggerated.

So What Happened Today?
To be honest, I came into my office today fully expecting an “up” day in the markets since we finally “bounced” yesterday. All technical indicators pointed to a severely “oversold” market (a market where selling is exhausted in the short term) that we were ready to bounce higher. In fact, I had prepared and positioned for it.

But overnight, Japan intervened in the capital markets to stem the seemingly unstoppable rise in the value of the Yen (which adversely affects their exports) right after Switzerland lowered their short-term interest rates to near zero yesterday (just like the United States). In addition, brewing concerns over Italian and other European debt problems were not helped by ambiguous comments made by the head of the European Central Bank on how they are dealing with their crisis. Suffice to say, with a 400,000 print in the weekly unemployment figures reported today, we were down from the start and never looked back.

As so often happens on a day when everyone starts to sell, the selling feeds upon itself and others join in. While we didn’t see any moments of panic, the selling was steady and relentless all day. What started out with gold and silver making highs in the morning ended the day with both at their lows.

Why? I believe it was because of forced selling and margin calls. When margin account balances need to be replenished, the most liquid of assets (like gold, silver and even Apple Stock) get sold off to cover the margin. So while there is nothing fundamentally wrong with many stocks and funds, they get sold along with everything else to raise cash for margin calls and for mutual fund shareholder requests for liquidations.

So Now What?
Despite the intense selling over the past couple of weeks, the S&P 500 is only 10% from the highs this year, just right in correction territory. You may recall that the markets corrected 16% last summer, and that’s never fun. Many then were predicting a double-dip recession around the corner and a return to a bear market. Neither of those happened; instead we moved up 30% to new highs in May. While past performance is no guaranteee of future results, I still don’t see any impending techincal signs that we are entering into a new bear market phase right now. If I did, I would be taking appropriate action. However, though this could change on any particular day, I believe this bull market still deserves the benefit of the doubt.

At the moment, as alluded to above, the market is extremely oversold and should bounce over the next few days. After that, it’s anyone’s guess what might happen, but I suspect that the remainder of the summer and into early fall will remain choppy, volatile and “lean” with a negative bias. While I expect more short-term downside, I don’t think panic selling is the right response now. While you may choose to cull some profitable positions, it may already be too late to sell most. As always, you should check with your financial advisor (or us) about the right course of action for your portfolio. Remember, no one can guess how high or low a market can go.

To be certain, I was not expecting the kind of response that we got from the market this week. But I could not foresee the actions and responses from central banks around the world either.

For our client portfolios, I’ve been keeping a good portion of investable funds in cash and had liquidated some positions ahead of this decline. Of course, I wish I had liquidated more, but alas, my crystal ball is still in the shop.

I’ve been wanting to put on some hedges via inverse ETF’s for some time now. But those funds are “too hot to handle” right now and with an oversold bounce overdue, they would only compound losses in the short term. Other hedges are also way too expensive right now as volatility is at 52 week highs. I usually like to wait for a bounce in the markets before putting on hedges, but the only bounce we got yesterday was a bit tepid and shorter than expected. I will look to put them on as soon as market conditions allow. If the selling continues in the short term as I expect, then I’ll look to lighten up other positions as appropriate as well.

On Friday, we’ll get the monthly jobs report for July, which is widely expected to be lousy and show a continued unemployment rate of 9.2%. Any selling that transpires in the morning will more likely result from margin call covering rather than a reaction the jobs number (or if we get more bad news overnight from Europe).

Please be sure to contact me if you have any questions or concerns about the markets. I’ll be happy to help, but please don’t take action based on the contents of this message. It’s not my intent to render actionable financial advice to anyone pursuant to investment advisor restrictions and regulations.

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How to Choose a Financial Advisor

March 31, 2011 — Sam H. Fawaz

You know the importance of saving for retirement, but do you have the time and know-how to accomplish your financial goals? In an increasingly busy world, it’s possible that keeping close tabs on your investment accounts isn’t exactly realistic.

Seeking the help of financial professionals has become more important to investors according to a recent survey conducted by Harris Interactive on behalf of TD Ameritrade Holding Corporation, as nearly one quarter (22 percent) of investors report relying more on a professional investment advisor following the recession.

Even if you have a good handle on your investments, you may find that hiring a financial advisor — who can put the time and energy into making sure you and your family plan for a secure financial future — may be a worthwhile investment. By hiring an independent registered investment advisor — commonly referred to as an RIA — you can make sure your investments are managed on a full-time basis by a professional advisor, while still having control.

Of course deciding to put someone in charge of your hard-earned money is not a process to be taken lightly.  Our preferred custodian, TD Ameritrade,  and we offer these tips to consider as you choose an independent financial advisor or RIA:

* Just as it is wise to do research on the background of anyone who would take care of your children, you should investigate the person or company you enlist to handle your money. The Securities and Exchange Commission, Inc. (www.adviserinfo.sec.gov), Financial Industry Regulatory Authority (www.finra.org), Certified Financial Planner Board of Standards (www.cfp.net), National Association of Personal Financial Advisors (findanadvisor.napfa.org/Home.aspx), and Financial Planning Association (http://www.fpanet.org/PlannerSearch/PlannerSearch.aspx), as well as your own state securities agency all collect background information on financial professionals that can be accessed through their websites. Use these sites to make sure the advisors you are considering haven’t faced disciplinary action for dishonest practices and are in good standing with regulators.

* Know the difference between working with an independent RIA and a stock broker, or other financial services provider. Independent RIAs, for example, are bound by law to act in their clients’ best interest. Brokers, on the other hand, are held to a “suitability” standard, meaning the advice they give must be suitable to that client’s situation. If you are looking for objective, comprehensive money management, you might want to consider an RIA.

* While RIAs are required by law to act in your best interest, there are other ways that you can ensure they will do what is best for you. One is to ask how they are compensated. Fee-only compensation generally minimizes conflicts of interest and means that your advisor is paid only for the management services and advice he or she offers, and only by you, not by investment product providers. When an advisor is paid on commission, there’s a greater chance he or she will make choices with your money that serve not only your interests, but their own as well. That’s not to say that advisors do not work fairly under this model, but potential conflicts of interest are something to consider as you choose an advisor.

* When looking for referrals from friends or relatives, the most valuable referrals may come from those in similar situations. It’s also a good idea to ask potential advisors if they specialize in working with certain types of clients and choose one that fits your unique profile.

* A third party custodian should also handle all your deposits, to ensure checks and balances. An independent custodian like TD Ameritrade can help ensure the safety and security of your assets, and will provide you with a clear, concise statement every month. A duplicate monthly statement is also sent to your advisor. Make sure this is also a legitimate and upstanding business.

Working with a trusted independent fee-only RIA can help you realize your financial goals, while allowing you to spend less time worrying about and managing your investments. If you need help and would like to talk to a fee-only planner with no sales pressure, cost  or obligation, please visit our web site at http://www.ydfs.com or call YDream Financial Services, Inc. at (615) 395-2010 or (734) 447-5305.

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What’s Going on With the Markets-March 10, 2011

March 10, 2011 — Sam H. Fawaz

Since the beginning of last September, the stock markets have enjoyed a nearly uninterrupted bull uptrend which has been unprecedented in market history.  Fueled by improving economics and Federal Reserve actions, the uptrend has withstood many geopolitical, fiscal and news driven setbacks.  But today the political unrest in the Middle East, issues with Spanish debt repayment and a higher than expected weekly first-time unemployment claim number (497,000) were the 1-2-3 punch that the markets could not recover from and therefore we suffered a 1.5-2.5% setback.  Be it stocks, gold, silver or oil today, they were all down today.

Normally, up-trending bull markets such as the one we’re in take rest periods, or “corrections” as they’re called, every couple of months while individuals and institutions take profits on stock positions and reset stock prices back to normal levels. Corrections (usually 10-20% of an index value such as the S&P 500) are healthy for the market and while uncomfortable if you watch them unfold from day to day, allow the markets to set up for the next leg up.  Two years to the day yesterday into this bull run have seen us move up about 100% from the March 9, 2009 lows on the S&P 500 index. Without a doubt, this has been an incredible run and I hope you’ve been participating.

As I’ve discussed with clients and prospects recently, a correction in the market has been long overdue and anticipated.  While today was the first big down day where we really tested key levels in the indexes, there have been several signs of exhaustion in the market. Despite this, I cannot say with certainty whether we’ve definitively entered into a correction period (technically we have, but it needs to be confirmed with follow-through on Friday and next week.)  If the bulls get their act together tomorrow and “rescue” the market by pushing it back up through heavy volume buying, then this decline may be “all she wrote.”  If not, we could head down to test the 1275 level of the S&P 500 index (we closed at 1295 today).  A failure to hold the 1275 level means that large institutions have decided to continue selling and a drop to 1240 may need to exhaust sellers.

With the “Day of Rage” demonstrations scheduled for Friday in Saudi Arabia, rocketing oil prices and sovereign debt issues, the odds of avoiding a deeper correction are not very high.  Besides, this correction is long overdue and may occur regardless of how peacefully the Middle East situation is resolved or even if oil prices come back down to earth.

What do I think? As I’ve mentioned before, the Federal Reserve has made investing in anything but the stock market earn near zero returns. That is, the government wants us to buy equities, push the stock market (and IRA’s and 401(k)’s) higher, to make us feel richer and more confident and therefore spend more.  Spending more creates demand which in turn creates jobs and so on.  So I believe that the gentle (if somewhat invisible) hand will come in to help support the market and avoid a protracted decline that might scare off the latest entrants into the market. While my crystal ball is still in the shop, I believe that a decline beyond 1275 in the S&P 500 (another 1.5%) is a stretch.  While that would make it a very shallow correction, it may be enough to breathe new life into the stock market and help resume the uptrend.

So what should you do now in light of a possible correction?  Basically, you shouldn’t do much if anything since nothing is confirmed.  If you’re investing on your own, trying to time your “in’s and out’s” of the markets is nearly impossible and not recommended unless you’re an experienced trader.  If you have a profitable position and worry about it turning into a loss, you may decide to sell a portion or all of it.  More savvy investors may be able to hedge their positions with options or inverse ETF’s if the decline proves to be protracted.  From our end for our clients, I’m watching the market technical levels on a daily basis like a hawk and already have begun to harvest some profits and protect some positions. If a protracted downturn does materialize, I may also hedge portfolios with inverse ETF’s and selectively liquidate partial positions.  But we’re not there yet and I’m not making any recommendations.  And by no means do I think we’re entering another bear market (by definition, a bear market begins when we decline 20% from the last peak in a major index).  Non-clients should consult their current advisor (or me) if you’re unsure what to do in the event of a protracted decline and should not treat this as a recommendation to buy or sell anything (see disclaimer below).

Last year we declined nearly 15% from May through August amid sovereign debt worries and economic uncertainty and then proceeded to push up nearly 25% over the next six months. I still believe that we will end 2011 with double-digit gains in the markets as this economy matures from recovery to expansion.  All economic indicators point positively and last month we even added nearly 200,000 new jobs.  We may even see housing perk up a bit later this year.  Without a doubt, sustained oil prices above $125 per barrel and $4 gasoline for an extended period (6 months or more), will put a crimp into the expansion, but I don’t believe we’re heading for a long term spike in oil prices.  Let’s just say that the oil producing countries learned what supply constraints and speculation did to oil demand the last time oil spiked to $145 a barrel. More electric and hybrid cars is just one example of how we are learning to live with less demand for foreign oil.

I hope this message helps alleviate any anxiety over the recent down days in the market.  Remember that the media loves good negative stories to help sell newspapers and advertising. Avoid the noise and try to keep your sanity during the days when it seems like there’s always something bad going on in the world.  Middle Eastern concerns have been a worry for decades, if not centuries now, and likely won’t be resolved during our lifetimes.  Like every other world incident, the markets get back to normal and we get through them.

Enjoy the upcoming weekend and don’t hesitate to contact me if I can be of any help.  If you’re not a client, your consultation with me is complimentary, no-pressure and with no obligation.  I’d love to talk to you whether or not you’re considering hiring a financial planner or money manager.

Sam H. Fawaz CFP®, CPA is president of YDream Financial Services, Inc., a registered investment advisor. Sam is a Certified Financial Planner (CFP®), Certified Public Accountant and registered member of the National Association of Personal Financial Advisors (NAPFA) fee-only financial planner group.  Sam has expertise in many areas of personal finance and wealth management and has always been fascinated with the role of money in society.  Helping others prosper and succeed has been Sam’s mission since he decided to dedicate his life to financial planning.  He specializes in entrepreneurs, professionals, company executives and their families.

All material presented herein is believed to be reliable, but we cannot attest to its accuracy.  Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions.  Opinions expressed in this writing by Sam H. Fawaz are his own, may change without prior notice and should not be relied upon as a basis for making investment or planning decisions.  No person can accurately forecast or call a market top or bottom, so forward looking statements should be discounted and not relied upon as a basis for investing or trading decisions. This message was authored by Sam H. Fawaz CPA, CFP and is provided by YDream Financial Services, Inc.

My no-nonsense no-spam policy: If you’d prefer not to receive future updates, just reply and let me know by typing “unsubscribe” in the subject (please don’t hit the spam button-it just puts me on a universal spammer’s list which is tough to get off of.)I’ll take you off my list immediately and permanently.  I will never sell, share, rent or give away your e-mail address to anyone.  Period.

Posted in General, investing, markets, retirement. Tags: , , , , . Leave a Comment »

Update on Extension of Bush Era Tax Cuts

December 7, 2010 — Sam H. Fawaz

I promised to update you on progress in changes to income tax legislation that affects all of us in 2011.  As you may recall, the Bush-era tax cuts were scheduled to expire after 2010, which essentially amounts to a tax increase if Congress didn’t act to extend them.

After the stock market close yesterday, President Obama, in a televised speech, announced a compromise with Republicans in Congress which, if passed into law, would amount to a much bigger fiscal package in 2011 than virtually anyone expected. In addition to a two-year extension of the Bush-era tax cuts, he added a one-year reduction in the payroll tax and a huge investment tax credit.  While the ultimate bill that gets passed may be different than detailed below, I wanted to get you some details right away.

I would expect that the proposal will be signed and turned into law in the next couple of weeks.  Among the highlights of the proposed bill are:

— A two year extension of tax cuts for all income levels.   The 15% rate on capital gains and dividend income would also be extended as part of the deal. The president also proposes a 35% estate tax rate, with a $5 million exemption.  It appears that the President traded tax extensions for the “rich” for unemployment benefit extensions and the below payroll tax deduction.

— Payroll tax deduction. This would reduce the 6.2% Social Security payroll tax applied to employee wages by 2 percentage points.

— Renewal of emergency unemployment benefits through the end of 2011. This would be more than the three-month extension most analysts had expected. It puts around $60 billion in the hands of unemployed citizens, which is much more than the consensus expected.

— ARRA tax cut extensions. Several small tax cuts in the American Recovery and Reinvestment Act, passed in 2009, will be extended, including an expanded earned income tax credit, and various education-related tax breaks.

— Full expensing of business investments in 2011.  This would allow the expensing of business investment in 2011, similar to the policy that the president proposed in September.  It will allow companies to deduct the entire cost of capital expenditures on their taxes rather than depreciate them.

Congress and the White House will need to work out the details, but I expect this tax bill to pass. It’s not likely that this lame duck Congress would leave for the holidays until this is sent to the President for his signature.  It’s rare that I pity the Internal Revenue Service, but with tax forms to revamp and guidance and rules to formulate, they will be behind the curve on getting this out.  I would expect some delays of 2010 income tax refunds for returns filed early, but none that are terribly lengthy.

The stock markets have been expecting this, and some of it already factored into current levels, but I still expect market reaction to be positive and further bolster any Santa Claus rally we may have coming.  This is essentially another huge fiscal stimulus plan, perhaps larger than any of us have been expecting or realize.

I’ve been saying all along that Congress will “hem and haw”, posture for their constituents, and pretend to be against tax cuts and for fiscal responsibility.  But ultimately the economy is too fragile to be saddled with a tax increase this year or next. Even I am a bit surprised by the depth and breadth of the bill, but I could not see Congress not doing something before year-end. Failing to pass something would have amounted to a quantitative easing neutralizer (i.e., rendering quantitative easing worthless).

I will keep my eyes and ears peeled open for more details about this bill and its ultimate passage and will let you know what ultimately gets passed. If you, a family member, friend or colleague would like more information about this or just need to talk about a financial situation, please feel free to forward a link to this post to them and suggest they get in touch with me (http://www.ydfs.com).  I will be sure to take good care of them.  As always, I’m available for any questions you may have and welcome your comments.

Have a great holiday season and look for my year-end and 2011 Economic and Market Outlook letter later this month.

Posted in General, investing, Taxes. Tags: , , , , . 1 Comment »

Don’t Be a Victim of Corrupt or Unscrupulous Financial Planners/Advisors

December 2, 2010 — Sam H. Fawaz

A late night news story on a Metro Detroit television station last night tells the tale of a couple (and others) robbed of their retirement by their financial adviser-here’s a link: http://bit.ly/eXgpO0

Some of you may have seen this video last night, got up, checked your online accounts, and wondered how you can avoid being an unwitting victim of an unscrupulous financial adviser or planner. Everyone would do well to heed the advice given at the end of the video.

Last year, I sent out a message on how you can avoid being Madoff’ed (see below), a reference to the New York investment adviser who bilked his clients, charities and investors of billions of their hard earned money. Bernie Madoff is currently spending a 150 year sentence in a Federal prison and his possessions are being auctioned off to repay a mere fraction of his victims’ losses.  I also sent out a message with Five Tips to Avoid Potential Investment Fraud (link below).

So what do we do at YDream Financial Services to help you sleep better and know that you’ll never become a victim of financial fraud? In cooperation with our custodian, TD Ameritrade Institutional, we have processes and procedures in place to ensure that you never become a victim to the extent that it is within our control.  In fact, I’ve written two short articles on this blog over the past couple of years that will help you rest easier knowing that your money is safe, sound and well protected:

How Consumers Can Avoid Being “Madoff’ed” https://themoneygeek.com/2009/03/24/how-consumers-can-avoid-being-madoffed/

Five Tips to Avoid Potential Investment Fraud https://themoneygeek.com/2009/04/13/five-tips-to-avoid-potential-investment-fraud/

I urge you to review these short two articles whether you are a client or not and protect what you’ve worked so hard to save and invest. If you have any question or concerns, please don’t hesitate to call or e-mail me (visit my website at http://www.ydfs.com). I will explain further how we take extreme measures to not only protect your money, but your personal and confidential information as well. Your trust in me is the most valuable asset I hold; I will work extremely hard to protect it.

Posted in Consumer Alert, Consumers, investing. Tags: , . Leave a Comment »

Happy Thanksgiving and a Quick Market Update

November 26, 2010 — Sam H. Fawaz

I just wanted to post a quick note to wish you and yours a very Happy Thanksgiving Holiday.  Here’s hoping that you are celebrating it in good health surrounded by family and friends.  Without both, life would be such a drag.

I am thankful for my family and friends, good health and the best clients and readers in the world.  I can’t imagine myself doing anything else that I would enjoy more in life than what I’m doing now.  I hope that you feel the same way about what you do, and if not, I hope you’ll take steps in your life to move closer to the activities that bring you joy and happiness.  It’s really about getting what you need and want out of the day rather than getting through the day.

A Quick Stock Market Update

The last few weeks have been quite volatile in the stock markets, and to be honest with you, it was really all my fault.  Right after I sent out my last newsletter update about the Federal Reserve pumping up the markets, we entered into a long overdue correction (a decline in prices).  As I had mentioned, the markets had gone straight up during September, October and early November, so it was no surprise that a correction was coming. We have swung up and down and sideways without much upside and thankfully without much downside either.

In some cases, I took advantage of this correction to “prune” (sell) certain client positions to lock in profits or avoid losses.  This past Tuesday, a day when everything was trending downward and things looked like they were about to fall apart (a day where about 90% of all asset classes were down) due to the events in Europe and South Korea, I took 95% of our available cash and invested it at the lows of the recent market range.  We were immediately rewarded yesterday as all the markets were up “big” to kick off what I hope to be a great year-end Santa Claus rally.  Seasonally, this period of the year tends to be the strongest for gains in the markets.  While we are technically still in a correction phase, I expect the uptrend to resume soon (but my crystal ball is still in the shop).  Recent economic news has been very positive, some much better than expected, and first time unemployment claims this week surprised nicely to the downside.

I still remain optimistic about a positive finish to the year and the rally continuing into 2011 as the economy recovers.  I believe that this is the best time to be invested in the markets as Uncle Sam has told us that he wants the markets higher. Consider taking advantage of this recent market correction to dip your toes into the market.  I like that most are pessimistic about the markets since that tends to propel them higher.  Yes, we have economic worries, future inflation, high unemployment and a moribund housing market, but those problems didn’t develop overnight, so they won’t be solved overnight either.  We are making progress, and that’s what really counts.

Later in December, I will send out my 2011 market and economic outlook newsletter.  In the meantime, year-end tax planning is in full swing and hopefully you’ve benefitted from my year-end tax planning newsletter and tips.  Remember, if you’re thinking about an IRA to Roth conversion in 2010, you only have about five weeks to complete it.  Don’t hesitate to contact us to discuss whether this option is appropriate for you. I am also available to help with your year-end financial or tax planning.

Enjoy your holiday weekend and please let me know if I can be of any help.  And remember: 50%+ off sales are great, but the best sales are those that save you more than 100% (that is, when you save and invest the money instead..sorry I couldn’t resist).  By the way, I was recently quoted in another online financial story-see the link below about Six Ways to Gift Money to Family.

New: 6 Ways To Gift Money to Family http://bit.ly/aDG90W

Sam H. Fawaz CFP®, CPA is president of YDream Financial Services, Inc., a registered investment advisor. Sam is a Certified Financial Planner (CFP®), Certified Public Accountant and registered member of the National Association of Personal Financial Advisors (NAPFA) fee-only financial planner group.  Sam has expertise in many areas of personal finance and wealth management and has always been fascinated with the role of money in society.  Helping others prosper and succeed has been Sam’s mission since he decided to dedicate his life to financial planning.  He specializes in entrepreneurs, professionals, company executives and their families.

All material presented herein is believed to be reliable, but we cannot attest to its accuracy.  Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions.  Opinions expressed in this writing by Sam H. Fawaz are his own, may change without prior notice and should not be relied upon as a basis for making investment or planning decisions.  No person can accurately forecast or call a market top or bottom, so forward looking statements should be discounted and not relied upon as a basis for investing or trading decisions. This message was authored by Sam H. Fawaz CPA, CFP and is provided by YDream Financial Services, Inc.

Posted in General, investing, markets, retirement. Tags: , , , . Leave a Comment »
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