Advice for Savvy Retirement Planning

Snapchat Stock

Snapchat parent company Snap Inc. (SNAP) initiated their public offering on Thursday amid a flurry of interest in their stock. According to their IPO documents filed Thursday, Snapchat lost roughly $514 million dollars in fiscal year 2016.

Company Founder and CEO, Evan Spiegel, indicated that it is possible that they “may never achieve or maintain profitability,” due to the financial effort involved in re-investing in their business.

Snapchat StockIn their filing, SNAP indicated that “We began commercial operations in 2011 and for all of our history we have experienced net losses and negative cash flows from operations. If our revenue does not grow at a greater rate than our expenses, we will not be able to achieve and maintain profitability.”

The loss of $514 million in 2016 comes against revenues of roughly $400 million. So they are still losing FAR more than they are bringing in on an annual basis. Despite increasing revenues from $58 million in 2015 (compared to a net loss of $372 million), their losses continue to widen.

By comparison, when Facebook launched their IPO in 2012, the company was already profitable, to the tune of $1 billion a year (against a $100 billion+ valuation for it’s IPO).

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About Robert Henderson and Lansdowne Wealth Management

Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog, The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K or Hewitt 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at Your 401K http://www.lwmwealth.com/services/your401k.html.

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An Important Market Update – Is the Sky Falling?

The Sky is Falling

Well, not quite. In the past week, we have seen the S&P 500 (the broad U.S. stock market, generally speaking) drop roughly 7%. This represents nearly the entire drop in the S&P on the year. Prior to this past week, the market was more or less flat year-to-date, oscillating up and down after a strong start to the year. Foreign markets are faring no better, and in many cases dropping precipitously. Such is the case with China’s Shanghai Index, down more than 40% from its peak in June. On an intra-day basis (prior to intra-day recoveries), the S&P actually dropped into correction territory (down 10% from peak).

What’s Causing the Corrections?

Unlike major corrections, the current drop is being fueled by a number of factors. But the primary drivers seem to be weakness in the Chinese economy, concerns about the Fed raising interest rates, and the current weakness in oil prices. But the reality is that, despite all the speculation, nobody really knows why the market moved the way it did the past several days. Realistically, it was nothing more than pent up market emotions coming to a head.

Moments like this demonstrate the importance of a well-diversified portfolio. Over-reliance on any particular asset class, sector, or “theme” can wreak havoc on a portfolio. At the same time, significant selloffs create an opportunity for investment managers to buy quality investments at a discount, or at least at a reasonable price.

What’s The Outlook?

While the continued global economic recovery has been slow and gradual, it has also been consistent (and persistent). From the perspective of most economists, virtually nothing has changed about the overall economy to prompt any type of bear market scenario. Employment continues to improve (albeit slowly), consumers are continuing to spend, and debt levels are not considered a problem.

Fortunately, unlike recent bear markets, there is no major impetus for concern. Oil prices could certainly be a problem, but the upside of low oil prices is more cash in consumers’ pockets to spend. We’ve been talking about Fed rate adjustments for years, so most of that concern should be emotionally priced into the market. Of course it all falls back to China. A major downshift in economic activity in China could have wide implications. But despite that, the US economy still looks robust.

The bottom line is that there is no tech bubble bursting like we saw 15 years ago, and no subprime mortgage crisis to contend with. What we have is a fear about prices. Investors are concerned about being caught with over-priced assets in an over-priced market. But other than during market bubbles, high stock market prices are generally not a cause of major stock market declines. What we CAN expect is continued volatility, well into the fall.

What it Means for Portfolios

Not a lot. It’s important not to make knee-jerk reactions to what are periodic and normal market drops. The markets has gone up relatively uninterrupted the past seven years, with a handful of material drops along the way, most notably in April 2010, August 2011, May & October 2012, and September 2014. So this drop seems right on schedule. While it may prove to be nothing more than a routine pullback, it could certainly evolve into something a bit more sinister. History would not suggest that, but it’s not beyond possibility.

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Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog,The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at Your 401K http://www.lwmwealth.com/services/your401k.html.

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Connect with me on FacebookGoogle+LinkedInPinterest and Twitter.

 

 

Market Update for May 2015

Robert HendersonMAY 2015 ECONOMIC COMMENTARY AND CAPITAL MARKET UPDATE

Recap: The U.S. economy grew at a 0.2% annual rate in the first quarter. It was the worst economic performance in a year, with evidence of a slowing international trade sector and anemic business investment. A sharp deceleration in hiring in March also ended a year long stretch of heady job creation, raising concerns about broader economic growth amid mounting evidence of a slowdown. Closely watched indicators of consumer spending, capital investment and manufacturing output have all slumped in recent months. A strong dollar has restrained U.S. exports and could continue to drag down broader growth. Much of the recent sluggishness may be chalked up to harsh winter weather across much of the eastern U.S., but the signs of weakness don’t end there. The spending boost from cheaper gasoline appeared to have faded or at least not materialized yet. Low oil prices have led to oil-field layoffs.

Despite these poor numbers, the weakness in consumer spending can be chalked up to weather related effects since underlying economic fundamentals remained on solid ground. Monthly employment figures have averaged 275,000 jobs a month over the last twelve-months – its strongest pace in 15 years – while the unemployment rate has steadily edged lower. Helping to accelerate employment gains have been the number of job openings that have reached new cyclical highs with each passing month. Moreover, as employment opportunities have become increasingly plentiful, the number of people leaving positions for new opportunities has also hit new post-recession highs, highlighting the impact that improving labor market conditions have had on overall sentiment.

This confidence has manifested in consumers, as evidenced by the Conference Board’s Consumer Confidence index, which surged to 101.3 in March before dropping slightly in April. This rise in consumer confidence alongside gains to household income appeared to have filtered through to vehicle sales in April.

Housing data has also started to show signs of a spring thaw. Pending home sales have increased while mortgage applications have also turned decisively higher in recent months. And while housing construction data has remained soft so far this year, building permits – a leading indicator for housing starts – has continued to point to a pick-up in building activity in the months ahead. Putting all of these factors together makes a solid case for an uptick in economic growth over the remaining three quarters of 2015.

GDP: Real GDP grew by just 0.2% (annualized) in the first quarter of 2015. The downturn in economic growth reflected a number of one-off factors. Harsh winter weather had its impact on consumer spending as well as the delivery of equipment and inputs to production. Second, the West Coast dock workers’ strike disrupted supply chains and again altered the strength of consumer spending and production. Third, the one-time shock of lower oil prices influenced the pace of business investment for equipment and structures as well as energy sector hiring and, ultimately, corporate profits. More lasting has been the impact of the rising dollar, which continued to weigh on net-exports and likely will do so in the quarters ahead.

Q1 2015 GDP Growth

Q1 2015 GDP Growth

 

Going forward, economic activity is expected to pick up in the second quarter as the adverse impact of temporary factors, such as poor weather and the West coast port disruptions subside.

Retail Sales: Retail sales rose 0.9% (month-over-month) in March. Gains were broad-based, with 9 out of 13 sub-components rising in the month. Besides autos, sales of building materials and garden equipment also delivered sizable gains. After rising in February, sales at gas stations fell 0.6%. Reflecting declining prices, sales at gas stations have fallen for 9 out of the past 10 months.

Following three consecutive monthly declines, consumers staged a comeback in March, with both headline and, more importantly, core numbers posting gains. Given the rebound in March, consumer spending should continue to rise in the months ahead, supported by robust real income growth, high consumer confidence and improved household balance sheets.

Q1 2015 Retail Sales

Q1 2015 Retail Sales


ISM manufacturing index:
The combination of harsh winter weather, the West Coast port stoppage, plunging oil prices and the soaring dollar has proven to be a devastating mix for the nation’s factories. The Institute for Supply Management (ISM) manufacturing index fell by 1.4 points to 51.5 in March, marking the slowest pace of expansion since May 2013. Eight out of the index’s ten subcomponents edged lower in the month. The backlog of orders, employment, exports and imports led the declines. New orders and inventory also retreated with inventories falling more than the new orders. The spread between the two—which tends to be a leading indicator of future activity—has widened ever so slightly, increasing from 0.0 to 0.3 points.

This is the fifth decline in the ISM manufacturing index in as many months. While the index still remains above the 50-point threshold, which corresponds to expanding manufacturing activity, ongoing declines suggest that the pace of expansion has continued to taper. However, the steady rise in real disposable income growth in the United States—supported by robust job growth and low inflation—will induce higher spending in the month’s ahead, providing support to American manufacturers.

Q1 2015 ISM Manufacturing

Q1 2015 ISM Manufacturing


ISM non-manufacturing index:
The ISM non-manufacturing index edged slightly lower in March to 56.5. However, as the value remained well above 50, it is in the expansion zone and indicates moderate economic growth. There was an increase in new orders and backlogs and the employment index. Prices paid rose for the first time in three months, suggesting some firming in inflation.

The modest decline in the non-manufacturing index over the past few months indicates that the manufacturing sector has taken the brunt of the dollar’s appreciation and port-related disruptions, while the service sector has been affected much less.

Q1 2015 ISM Non-Manufacturing

Q1 2015 ISM Non-Manufacturing


Inflation:
Underlying U.S. inflation appeared to be firming despite slower economic growth, a potentially reassuring sign for the Federal Reserve as it weighs when to start raising interest rates. U.S. consumer prices increased for the second consecutive month in March after falling through much of the winter. The CPI increased 0.2% in March from a month earlier that matched the increase the previous month, which was the biggest rise since June.

The overall price gauge has trended downward since last summer when oil prices began to tumble. But the momentum appears to have shifted. Stabilizing energy prices have helped recent headline inflation measures move higher. This shift is expected to continue in the coming months as the early effects of low oil prices wane further. On the other hand, the core prices, excluding the volatile food and energy categories – have climbed 1.8% over the past year, reflecting higher costs for housing and medical care.

Small Business Optimism index: The NFIB’s small business optimism index unexpectedly declined in March, falling by 2.8 points to 95.2. All 10 of the major sub-components recorded declines in the month, with the largest deterioration coming from the percent of firms expecting the economy to improve and current job openings. The net percent of surveyed firms expecting to increase employment make new capital outlays and boost inventories over the next several months all recorded sizeable declines

The pullback in the percent of firms planning to hire is particularly discouraging, especially coming on the heels of last month’s weak payrolls report. Given the forward-looking nature of this subcomponent, the decline in March suggests that there may be more than lagged weather effects weighing on last month’s slowdown in employment.

Going forward, the overall economic backdrop should remain favorable for small and medium sized businesses. This is because of favorable accessibility to credit, a low interest rate environment and low commodity prices. These factors should provide a boost to overall household income and, in turn, support future sales growth.

US Dollar: For most of 2015, the dollar continued to rise rapidly. According to the Wall Street Journal SJ Dollar Index, the U.S. currency strengthened 12% against rivals in 2014, and gained more than 8% through the end of April. But the dollar’s rally has faltered in recent weeks. Despite the recent pullback, we still expect the dollar to appreciate as the U.S. economy maintains a faster growth rate than that of Europe and Japan though the rate of ascent should slow. The euro and yen will continue to struggle under powerful monetary easing measures, ranging from low – and even negative – interest rates to massive government asset purchase programs.

Trade: The U.S. deficit in trade in goods and services surged from $35.9 billion in February to $51.4 billion in March. Both exports (0.9% M/M) and imports (7.7%) rose in the month, with far greater movement in the latter. March’s sharp decline in the deficit was impacted by the port disruptions on the West Coast. However, there were also other reasons for lackluster export growth. Specifically, slow growth in some of the country’s major trading partners and the appreciation of the dollar, which rose more than 15 percent on a trade-weighted basis between the end of June 2014 and mid-March 2015.

In terms of the second quarter, this trade number starts the economy on a very poor footing. Even with a large upward turn in monthly indicators, second quarter real GDP growth could come in at a relatively subdued level, which would mean a weaker first half of the year than in 2014.

Fed: The Fed has attributed the economy’s sharp first-quarter slowdown to transitory factors, in effect signaling an increase in short-term interest rates remains on the table; although the timing has become more uncertain. The Fed now needs time to make sure its expectation of a rebound proves correct after a spate of soft economic data. The chances of a rate increase by midyear have diminished.

The Fed sees the risks to the economic outlook as balanced—an important sign that they aren’t at this point alarmed about the first-quarter slowdown. They believe that conditions are ripe for consumer spending to pick up in the months ahead, in part because employment, incomes and confidence have risen and falling gasoline prices have boosted household purchasing power.

International: So far, the European Central Bank’s quantitative easing program appears to have been successful at shoring up confidence and boosting economic activity in the Eurozone. Much of the impetus has been related to the sharply lower euro, which has declined over 20% in the past year. The lower currency has boosted exports. With imports unchanged, this has left the trade surplus higher for the single-currency area. Industrial production also surprised to the upside in March. The lower euro has helped inflation, which has remained slightly negative on a year-over-year basis as a result of lower energy costs, but appears to be turning the corner in light of stronger core measures.

The rest of the global economy is still adjusting to a new, more challenging, economic scenario created by the continuous slowdown in growth of the Chinese economy and by the recent collapse of the price of crude oil. The economies that are suffering most are those that have relied heavily on exports of commodities to China and the rest of the global economy. Those economies will now need to rely more on their domestic consumer markets to do the heavy lifting as external markets will remain constrained for some time. However, this is easier said than done, as many of these economies also relied on the revenues generated by this growth in exports to fund domestic demand.

But not all of the developing countries will be able to easily adapt to this new environment. Those countries that are linked more to the U.S. economy will continue to see relatively strong economic growth but those that relied more on the rest of the global economy will continue to lag behind. At the same time some of these countries put forward policies that were good in times of prosperity but that today are called into question. Perhaps the case of Brazil and its industrial policy is the most vivid example of policies gone awry with the scandal unearthed over the past several months regarding payments for projects contracted by Petrobras.

Outlook: The U.S. economy has been gathering steam, with evidence mounting that it will bounce back up in the second quarter. Auto sales rebounded strongly in recent months, after being depressed by weather in January and February; the housing market has shown signs of a spring thaw; and consumers have remained confident. The job market took a bit of a breather in March, but one months’ weak jobs tally needs to be put in the context of months of very solid hiring and a very harsh winter. Strength in the U.S. labor market will underpin the best pace of consumer spending in a decade in 2015.

Real disposable income should to rise in 2015 with gains reflecting the fundamentals of better job and compensation growth along with lower inflation. Meanwhile, continued gains in household wealth via financial assets and real estate should also support stronger consumer spending, as will easier standards for obtaining consumer credit.

Equipment and structure spending will bear the brunt of the decline in energy and other commodity prices. The slowdown in equipment and structure spending will reflect reduced investment in the mining and energy sectors. However, we do not project this weakness into a national slump as business credit continues to ease and other industries are in stronger positions to increase capital outlays.

Housing starts and residential investment should continue to improve over the course of the year. In addition, government spending continues to exhibit a turnaround after three years of negative impacts on growth.

Net exports are also in a turnaround situation—but this time there is flip from positive to negative. Both income and price effects have been negative. Weaker income effects reflect the sluggish global economic outlook for key trading partners. The price effect reflects the rise in the U.S. dollar exchange value. Add to these the fact that American consumers will boost imports, and the net effect is a negative impact on net exports and GDP growth.

Year-over-year inflation will continue to rise in the year ahead. The base effect of lower energy prices in 2014 will begin to drive up reported year-over-year numbers later this year. The FOMC will likely begin to lift the federal funds rate in the third quarter and we expect that the long-end of the Treasury yield curve will rise, but only partially, in response to a higher funds rate. However, we also anticipate that the credit cycle is ahead of the economic cycle, and decision makers need to be vigilant that investment decisions reflect the rising cost/declining quality of credit going forward. Corporate profit growth should overcome the energy hit and resume its 4%-5% pace for 2015. Finally, US dollar strength should persist over the remainder of 2015.

Sources: The Conference Board, NFIB, Wall Street Journal, Department of Commerce, Department of Labor, Institute for Supply Management

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Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog,The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at Your 401K http://www.lwmwealth.com/services/your401k.html.

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Connect with me on FacebookGoogle+LinkedInPinterest and Twitter.

 

Best Paying Careers

Best Paying CareerThis is a great article from Business Insider showing the Best Paying Careers among 820 different occupations. The article shows a data chart which was constructed by Reddit user Dan Lin, pulling wage data from the Bureau of Labor Statistics.

This chart is a must-read for parents out there helping their children navigate the difficult waters of career-exploration. There are some simple take-aways from this article:

1. The highest paying careers (generally, $75K and over) are clustered among Medicine, the STEM categories (Science, Technology, Engineering, and Math), and Business.

2. The lowest paying careers are clustered among Personal Services, Food Service, Hospitality, Creative/Arts careers, and Retail

3. Moderate paying careers tend to fall within the general categories of Teaching, mid-level Management, Manufacturing, Skilled Labor, Therapists/Social Workers, Technicians, and Mechanics.

Highest Paying Careers

Highest Paying Careers

 

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Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog,The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K or Hewitt 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at Your 401K http://www.lwmwealth.com/services/your401k.html.

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What is The Taper? Don’t Panic

Mount St. Helens** UPDATE **
12/18/2013

Well, there you have it. The Fed has finally announced it plans to being Tapering their bond buying from $85B a month down to $75B a month. Truth be told, the reduction in bond buying is symbolic, nothing more than market window dressing. In reality, it accomplishes nothing, as materially, they are still buying a whole lot of bonds. But what it does accomplish is to acknowledge that tapering has begun, and allow the market to get over its Tapering Phobia. Going forward, this allows the Fed to essentially reduced bond buying at any point, by virtually any amount, without further spooking investors.

What’s Going On?
So here we go. We’ve had QE, The Fiscal Cliff, the Debt Ceiling, and The Sequester. Now we have…The Taper. Sounds like a series of John Grisham novels. Yesterday, Fed Chairman Ben Bernanke spoke about the Fed’s views on the state of the economy and their strategy moving forward regarding slowing or eliminating of the current quantitative easing measures (QE, or buying of bonds) the Fed has been undertaking.

The major concern, and what prompted the vicious selloff in markets yesterday, which has spilled over into today, is that the Fed has been artificially propping up markets with their QE measures. While many have wanted to dismiss the bond buying process as an invalid reason for the market running up the past year or so, the actions of yesterday and today indicate otherwise.

I Don’t Get It
OK, after the credit debacle in 2008, the Federal Reserve Bank (The Fed) began a series of measures to “re-inflate” the economy. Primarily, they began buying up U.S. Treasuries and mortgage securities (known as Quantitative Easing, or “QE”). They did this in multiple “rounds” (ie. QE1, QE2, etc.). By buying these bonds, it pushes liquidity (cash) into those markets. Typically, Fed bond buying is done to lower short-term interest rates (to prompt borrowing which encourages economic activity). However, since short-term interest rates were at virtually zero, they have used the less-conventional method of buying longer-dated bonds to lower long-term interest rates (ie. mortgages).

The other affect that lowering interest rates has on markets, is that investors seeking reasonable returns have seen their interest income plummet over the past few years, which induces them to seek riskier, higher returning investments in the stock market. By doing so, simple economics plays out and stock prices (by virtue of supply/demand) are pushed higher, regardless of economic underpinnings. In a nutshell, the Fed has been artificially inducing economic activity, pushing down interest rates, and forcing investors into the stock market.

So What Just Happened?
Investors are concerned about what will happen once the Fed turns off the QE faucet. All indications are that the Fed will begin to “taper” their purchases of assets over time, as the economy continues to improve. There are some benchmarks the Fed is using to prompt this “taper” of buying, such as a lower unemployment rate (6.5%), and a target inflation rate (roughly 2.5%).

In yesterday’s speech, Bernanke indicated that the economy may be moving along a bit faster than expected, and that the tapering of bond purchases could begin later this year. This prompted a sharp selloff of stocks AND a dramatic rise in interest rates (which directly reduces the price of bonds). The interesting part about the speech was that there was really nothing new that the Fed reported. The news was essentially the same as what we have been hearing and expecting for quite some time. But with investor psychology being what it is, it appears that most people are now feeling like the recent stock market growth has run its course, and is primed for a pullback. This essentially causes a “herd” mentality in the market and investors begin to exit the markets en masse.

Should We Panic?
Much of what is going on right now is knee-jerk panic selling. Lots of institutional investors (mutual funds, high-frequency traders, etc.) are trying to sell ahead of the crowd. Having said that, I have been talking for a year now about how fragile the economy really is, that the stock market was becoming over-heated, and that a “Day of Reckoning” would come. Unfortunately, we have no idea if that day is now. And keep in mind, we also have no idea how far markets can fall once they begin falling.

What is unfortunate is that right now, quite simply, EVERY asset class is getting hammered (U.S. stocks, global stocks, bonds, gold, silver, commodities, etc.). It is one of those very rare situations where poor conditions for both stocks AND bonds are converging.

The good news for our clients is that we have been taking riskier investments off the table for quite some time, and last week reduced our risk exposure even further. This is not to say that we have no exposure to risk at this point. Portfolios are still invested, but the risk has been scaled back. We will be watching markets very closely, and will pare back our exposure even further should conditions continue to deteriorate. The last thing we want to do is sell off much of our portfolios, only to see markets reverse quickly back up (which happens quite often).

In the short-term we simply have NO way of knowing where the market will go. There are no easy “rules” to follow when looking at the short-term picture. The only rule we try to follow passionately is “don’t lose investor money”.

Rest assured that we are watching all of our portfolios and the markets very closely. Should you have any questions, please don’t hesitate to let me know.

Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog, The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

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The Sequester – What Is It?

Capitol HillHere we go again. First we had the Fiscal Cliff drama to contend with, then Congress entertained us throughout the holiday season with their Debt Ceiling antics. As if that were not enough, now we get to watch as Congress and the White House do their silly little political dance over the latest national fiscal crisis, the Sequestration.

The Sequester – What is It??
If you recall from my article a few months ago on the resolution of the Debt Ceiling crisis, part of the resolution that was agreed upon back during the 2011 Debt Ceiling argument was a provision in the Budget Control Act of 2011. This provision essentially mandated over $1 trillion in federal spending cuts over 10 years, with half coming from the military defense budget, and the other half coming from domestic discretionary spending.

For 2013, this will mean roughly $85 billion in across-the-board spending cuts. These automatic cuts are scheduled to go in effect on March 1, 2013. Along with military defense, the remaining cuts will impact programs all across the nation, from energy, housing, and law enforcement, to education and public safety. Currently, entitlement programs such as Medicare, Medicaid, and Social Security are not affected.

Don’t We Want Federal Spending Cuts?
Well, yes and no. Conventional economic wisdom says that it is always best to implement spending cuts when the economy is robust and growing. That way, there is a much milder impact on overall economic growth. But as we have experienced the past five years, the economy is in an extremely fragile state, and many believe that $85 billion in current-year spending cuts will be the proverbial straw that breaks the camel’s back. The 4th quarter of 2012 saw the slowest growth (virtually flat growth) since the recession ended in 2009. The most serious concern is that the Sequestration will throw the economy back into recession.

While we have emerged from recession since 2008, the recovery has been the weakest recovery from recession in history. With still historically high unemployment, a fragile housing market, all-time low interest rates, a European union on the verge of economic collapse, and tax increases on virtually all Americans, now does not seem like the appropriate time to slash yet more economic activity. Keep in mind, while federal spending can be looked at suspiciously, a dollar spent on wages for a federal worker are no different than wages spent in the private sector. Both produce equal value in terms of economic activity.

So What Does This Mean?
Fortunately (and I use that term quite loosely), we have the hindsight having already been through Debt Ceiling I, Debt Ceiling II, and the Fiscal Cliff all in the past few years. So we know a little bit about how this story might play out. Already we are seeing increased volatility in the stock market as nervous investors begin to re-think their investment decisions. I don’t anticipate that ending soon.

My hope is that Congress and the White House come to an 11th hour resolution before the President is required to mandate the cuts as prescribed in the Sequestration bill. As we are quickly approaching the deadline, there is a good chance that a deal will not be struck before the deadline, and we will begin hearing about the spending cuts such as work furloughs and program cuts immediately. Any agreement that is made could suspend those spending cuts going forward.

Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog, The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

What is The Debt Ceiling?

Debt Ceiling

The Debt Ceiling – What is It??
The Debt Ceiling is an arbitrary number that limits the amount of debt the U.S. Government is allowed to take on. Think of it as a giant credit limit for the government. The debt that the government takes on comes in various forms of U.S. “Treasuries” – bonds, bills, notes, TIPS, savings bonds, etc.

Why the Debate?
Like a credit limit on a credit card, as the total national debt grows ever larger (recently eclipsing $16 Trillion), politicians, economists, and citizens grow ever more concerned about how we will be able to service this debt (pay the interest to the holders of Treasuries). The debt ceiling currently stands at $16.4 Trillion.

Virtually every year, the U.S. Government spends more than it takes in, thus the need to issue debt to fund the shortfall. During good economic times, this is not a terrible thing, as excess spending helps keep the economy moving and growing. Most large corporations operate the same way – they fund a portion of their investments and cash flow with debt (bonds) that are issued to investors. When interest rates are low (as they are currently), more debt is issued. As interest rates rise, many companies will pay off some of their debt to keep their interest expense lower.

This is where the issue for the government gets sticky. Interest rates are at an all-time low. Current debt service is roughly $360 Billion, and only trails in magnitude to expenditures for the military and entitlements (Medicare, Medicaid, etc.). However, every 1% increase in effective Treasury interest rates will result in an increase of roughly $165 Billion of additional interest expense to the U.S. government. And if you think rates are going to stay at an all-time low forever, you’d be sadly mistaken. If we consider a move over the next several years back to an average rate of 3.5%, which is still well below the historical average, that would result in debt service of roughly 700 Billion (assuming the national debt stays where it currently is at $16.4 Trillion), or more than double the current debt service.

Should We Raise the Debt Ceiling?
This is the big question. The reality is that current government spending has already been authorized by Congress in prior years. So raising the debt ceiling right now is essentially agreeing to pay for the obligations we have already committed to. In other words, we really don’t have a choice (other than default, which is not a realistic option, despite what some media fear-mongers will have you believe).

So If We Don’t Have Much of a Choice, Then Why Not Just Raise The Ceiling?
The answer has two parts: First part – it’s political. The GOP is tired of uncontrolled spending and lack of a cohesive national budget, and the Democratic party does not like having their spending policies reigned in. I’m not here to debate the politics of this, but rather highlight the issue.

The second part is that by putting up obstacles to raising the debt limit, it is creating a national conversation about where our nation is headed fiscally and economically – not an unimportant conversation to have.

It looks like the GOP will be willing to raise the debt ceiling in exchange for a firm federal budget.

So What Does it Really Mean?
What this means is probably more months of debate. Like the “fiscal cliff” scenario that unfolded in the latter half of 2012, the debt ceiling will be the buzz phrase for 2013.  So look for more instability in the markets this year.

With Congress agreeing at the 11th hour to a resolution on the fiscal cliff, the markets were able to sidestep a calamity. Expect similar antics and drama from Congress this year.

** Update **
Subsequent to publishing this article, the House GOP gave in and easily passed a 3-month extension of the debt ceiling, giving Congressional leaders more time to hammer out a budget and a permanent agreement on future debt ceiling debates.

Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog, The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K or Hewitt 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at http://www.lwmwealth.com/services/your401k.html.

Fiscal Cliff Resolved – Financial Implications of Taxpayer Relief Act of 2012

Fiscal Cliff ResolvedOn January 1, 2013 the U.S. House of Representatives passed the American Taxpayer Relief Act (ATRA) of 2012 (H.R. 8), by a margin of 257 for and 167 against. The bill now goes to the President to be signed before being enacted as law. The law will permanently extend many of the tax provisions that had been set to expire at the end of 2012. Incorporated in the bill are also some modifications to certain tax rates and benefits. The approval effectively addresses the uncertainty surrounding the fiscal cliff debate, even if the outcome is not necessarily the most satisfactory for all taxpayers.

Some of the highlights and most notable components of the ATRA bill are summarized below:

Tax Rates for Individuals

The current tax brackets for the 10%, 15%, 25%, 28%, and 33% income brackets are permanently retained. The 35% tax bracket still exists, but only for incomes between $388,350 and $400,000, with a new top tax bracket of 39.6% for incomes above $400,000 for individual filers, and $450,000 for married couples.

The 0% and 15% tax rates for qualified dividends and long-term capital gains will remain in place, and a new 20% tax rate for will apply to filers that fall within the highest income bracket (39.6%). Whether you pay 0% or 15% on capital gains will depend on which income tax bracket you fall into (0% for 10% and 15% income bracket filers).

Limits on Itemized Deductions

Itemized deductions will be limited. Generally, itemized deductions will be set to phase out at 3% of AGI over a threshold amount or by 80% of allowable itemized deductions, whichever is less. Below qare the thresholds:

  • Married Filing Jointly: $300,000 of AGI
  • Qualifying Widow: $300,000 of AGI
  • Head of Household: $275,000 of AGI
  • Single: $250,000 of AGI
  • Married Filing Separately: $150,000 of AGI

Limits on Personal Exemptions

Like Itemized Deductions, Personal Exemptions will also be phased out above a certain income threshold. Exemptions will be reduced by 2% for each $2,500 by which AGI exceeds the threshold. The income thresholds for Personal Exemption phase-outs will be the same as for Itemized Deductions (as seen above).

Alternative Minimum Tax

AMT tax exemptions will now be indexed for inflation annually, and permanently extends historic patches that had been put in place in prior years. The current exemption amounts are

  • Married Filing Jointly: $78,750
  • Qualifying Widow(er): $78,750
  • Single: $50,600
  • Head of Household: $50,600
  • Married Filing Separately: $39,375

Estate Taxes

ATRA permanently extends the $5 million exclusion, indexed to inflation, and unified exemption amount with portability. The new top tax rate for estates is 40%.

Other Notable Tax Deductions and Credits

There are many other small modifications and/or extensions as part of the ATRA bill. Below are some of the most notable:

  • Student Loan Interest Deduction is permanently extended.
  • Mortgage Insurance Premiums will continue to be deductible through 2013.
  • Sales Tax Deduction in lieu of state income tax is extended through 2013.
  • The above-the-line Tuition and Fees deduction is extended through 2013.
  • Child Tax Credit is permanently extended (with modifications).
  • Dependent Care Tax Credit is permanently extended.
  • Earned Income Tax Credit for families with three or more dependents is permanently extended.
  • Tax-Free Charitable Distributions from IRA’s of up to $100,000 per year is extended through 2013.

Roth 401K Conversion Provision

In a unique new twist on the Roth movement, ATRA will now allow holders of 401K funds to convert their traditional 401K assets to Roth 401K assets, even if the plan would not normally allow a distribution out of the plan (which is what would typically predicate a Roth designation for a rollover).

It will require that the plan currently offer a Roth 401K option for participants. Keep in mind that taxes will still be due on conversions, so whether or not this makes sense for participants is predicated on each individual’s tax situation.

Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog, The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K or Hewitt 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at http://www.lwmwealth.com/services/your401k.html.

What Is The Fiscal Cliff And How Will It Impact The Economy?

* Update – Since we posted this article, Congress has come to a resolution on the Fiscal Cliff debate. To learn about how it will impact you financially, see our latest post here – The Fiscal Cliff Resolved *

Take a look at this Fiscal Cliff infographic from our friends over at NerdWallet. And to gain a better understanding of the Fiscal Cliff in Simple Terms, take a look at our last blog post.

What Is the Fiscal Cliff?

What is the Fiscal Cliff – In Simple Terms?

Fiscal Cliff* Update – Since we posted this article, Congress has come to a resolution on the Fiscal Cliff debate. To learn about how it will impact you financially, see our latest post here – The Fiscal Cliff Resolved *

The Fiscal Cliff – What is It??
The Fiscal Cliff is the affectionate term used to describe a series of tax increases and federal spending cuts scheduled to take effect at the beginning of 2013.

How Did it Come About?
If you remember, in 2011 the U.S. was facing a debt crisis (and still is) where we were reaching what is known as the “Debt Ceiling”. This is the pre-determined limit to which the government is allowed to borrow (issue treasury securities) to fund operations. Think of it like a credit card limit. Over the years, this limit has been increased dozens of times to keep pace with growth in GDP (sort of like increasing your credit card limit as your family income goes up).

Historically, other than during WWII the national debt (which is almost always bumping right up against the Debt Ceiling – essentially “maxing out”) has remained somewhere between 40-60% of U.S. GDP. However, in the past four years, our debt has exploded to nearly 100% of GDP. (It should also be noted that we are currently adding about $1 trillion per year to the national debt, so the prospects of actually reducing the national debt are fairly remote. Even if we managed to run a balanced budget at some point in the future, the only way to manage the debt load is to wait it out – essentially hope that GDP and inflation catches up and helps minimize the debt-to-GDP ratio at some point in the future).
Debt Ceiling Ratio to GDP History
As part of the deal in Congress to raise the debt ceiling, it was agreed that there would be a series of spending cuts and tax increases to offset the increased debt (this was known as the Budget Control Act of 2011). The assumption at the time is that the economy would be on the mend, and we would be back on our way to prosperity. And here we are. Despite the occasional tidbit of good news and media spin, we are nowhere near “on the mend”. The proof is in the numbers.

So What’s It Going to Do?
Assuming Congress fails to act (hey, I’m going way out on a limb here, I know), the single largest deficit reduction program in history will fall into place. Anchored by a combination of tax increases and federal spending reductions, the measures are set to automatically reduce the federal budget deficit by over $500 billion next year.

That Sounds Great, Tax the Rich and Reduce Government Spending – Isn’t That What Everyone Wants?
Well, not exactly. To be more specific, the tax increases don’t just target the wealthiest Americans. Part of the tax cuts that President Bush put in place included a reduction in the payroll tax, which by definition will impact wage earners making roughly $110,000 or less. In addition, every tax bracket goes up including the 10% and 15% tax brackets, which are scheduled to rise to 15% and 28% respectively. There are also lower-income tax credits such as the Child Tax Credit, Earned Income Tax Credit, and the Marriage Penalty Relief that are scheduled to be reduced or phased out. While these tax changes will impact most taxpayers, there are also additional tax implications for the wealthy, such as changes in the Estate tax, the Capital Gains tax rate, the Qualified Dividend tax rate, and the Alternative Minimum Tax.

On the federal spending side of the equation, there will be automatic spending cuts of roughly $55 billion on military defense and $55 billion in non-defense spending. Impacted programs will include those such as education, food programs, and a significant reduction in Medicare reimbursements to doctors (like, a 27% drop).

While all of this sounds like the recipe we need to get on track and yes, we as a nation are constantly demanding fiscal restraint from our politicians, this creates a scenario that is just a bit too dramatic at a very fragile time for our economy. I liken it to someone that has spent 20 years sitting on the couch eating potato chips and one day wakes up and decides to run a marathon to get back in shape. It’s too much too soon. Hence, the term “Fiscal Cliff”.

Why the Concern?
Here’s the thing…our economy is at a breaking point. While we have seen some good news recently, in reality when you look at the numbers, they are simply less worse than the past few years. But we are not even remotely close to a “healthy” economy.

We have somehow come to accept 7-8% unemployment as normal. Post-depression, the only time we have seen unemployment this high for this long, was in the late 70’s/early 80’s. Most of you reading this probably remember that time period. Do we really remember it fondly? Should I remind everyone what that looked like? It was a decade of stagnant growth and soaring inflation (“stagflation”).

Housing was the single largest contributor to our current economic condition. Essentially, the credit crisis in 2008 interrupted lending virtually overnight, which led to tightened control over mortgage credit, which led to a precipitous drop in home values, which halted the party in home equity spending. This then led to a glut in foreclosures and housing inventory, and an overnight drop in construction. Millions of Americans working in any industry related to housing lost their jobs or saw their incomes crater. And this party isn’t over. Like unemployment, housing starts, while up quite a bit over 2011, are still nearly 50% lower than the 50-year average prior to 2008.

So What Does it Really Mean?
If there were ever a time to NOT take money out of consumers’ wallets (ie. tax increases), NOW would be that time. And as much as it pains me to say it, government spending does lead to economic activity. But as they say, what one hand giveth, the other taketh away. For every dollar the government goes over budget, that is one more dollar they must borrow and pay interest on. At some point, the debt would become unserviceable. While that will likely never occur, it would be the worst-case scenario.

Federal Tax Revenues vs. Government Spending

Tax Revenues vs. Government Spending

The Congressional Budget Office (CBO) has put some pretty bleak estimates on the economic impact if an adequate agreement is not met. The most likely scenario is that some sort of deal is struck with both sides making concessions.

The biggest threat right now is an incredible imbalance of confidence. Companies are afraid to hire new employees, stock their shelves with goods, or spend available capital because of the uncertain economic climate. My guess is that this uncertainty is going to remain for quite some time until an agreement is reached in Congress. In the long-term, things will work themselves out and we will all move on. Until then we are going to see highs and lows in the market every time someone says “Boo”. The media is driving this thing right now, so strap in for a bumpy ride.

Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog, The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K or Hewitt 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at http://www.lwmwealth.com/services/your401k.html.