- We are very pleased to announce that we have upgraded the ProVise website. We think the new site is more visually appealing and offers better content. We hope you agree. We will be using the website to provide a number of services to our clients that we will be announcing over the next 12 months. If you have a chance, take a few moments and visit www.provise.com. We would appreciate any comments you might have for further improvement.
- As we began 2013 America was looking ahead to President Obama’s second term, the passage of a tax bill that raised government revenue significantly, discovering that fourth quarter growth was virtually flat, corporate earnings that had only a few mild surprises to the upside and several to the downside, and finally, an increase in Social Security taxes of 2%. Then the sequester kicked in in early March, a band aid was used to patch the government together until the end of September, (which basically adopted the sequester cuts formally) and we saw the nervousness the European markets, highlighted by Cyprus. Yet, the markets turned in one of its best first quarter performances since the mid 1990’s. The DJIA was up 12.02%, the S&P was up 10.61%, the Russell 2000 was up 12.39%, and the MSCI EAFE was up 5.15%. The bond markets slowed down and declined 0.13%. The DJIA set several new all-time highs, and the S&P 500 finally broke through on the last trading day of the quarter. Given all of this negative news, how is all this possible? The Wall Street maxim is “the market climbs a wall of worry” and certainly, it has plenty to be worried about. Unfortunately, many investors are not enjoying this market, as the trading volume has been relatively light and there is still a lot of cash on the sidelines. Many people are waiting for the market to retreat before jumping in, and it is likely there will be a pull back at some point. No market goes straight up. A correction of 5% to 10% is a normal part of a healthy bull market. In fact, the market has had 13 corrections of 5% or more since it started its upward trend in March 2009. The average has been a pull-back of 8.7%. Ninety days ago, we suggested that if investors got an 8% to 10% return out of the year that they should be happy. So far, they seem to be. Fortunately, greed has not kicked in. A similar pattern took place last year with most of the market gains occurring during the first few months of the year and then the market basically moved sideways the rest of the year with a surge during December, bringing the good returns of last year. What happens if investors who have not gotten into the market feel suddenly compelled to do so? This is a great fear, but so far bond purchases have continued at a significant pace. Should this fixed income money loosen up and find its way into the stock market, it could cause a huge surge and cause the market to get ahead of fundamentals. At present, it is not. The market is selling at about 14 times earnings and historically, it sells at 15 to 17 times. While there is always risk in the stock market, we see much greater risk to the bond markets over the next couple of years. As the economy improves, interest rates will go up and the Federal Reserve will cease its accommodating posture of adding $85 billion of cash every month to the economy. As interest rates rise, you can expect bond prices to decline, and they could do so sharply and quickly. There can always be that “unknown surprise” that causes us to go off balance, but as we look forward right now, the slow growth of the last couple of years is likely to continue for the next quarter or two, with some acceleration likely occurring later this year as more people become employed. Last year, we averaged about 150,000 new jobs per month and this year, the average is running at about 200,000 per month. Should this continue, it will be a very positive sign for the economy.
- With all of the things there are to worry about in the world today, it’s hard to know which one to worry about the most. We are pleased to tell you that we are taking one worry away today. Metropoulos and Company and Apollo Global Management, after their $410 million acquisition, announced that by this summer they will be producing Twinkies once again. As you may recall, Hostess filed for bankruptcy and has been selling off its brands in pieces. If you have not gotten your “Twinkie fix” since production ceased in November, it’s time to get ready. Don’t you feel better already?
- With a tweak here and a tuck there, the Senate voted 73 to 26 and the House voted 318 to 109 to send a budget bill to the President, which basically keeps the government running until the end of September. Without the bill, the lights for the government would have been turned out on March 27th. Some people, obviously, would think that was a good idea. We, of course, think that the lights have been turned out in Congress for several years now. Essentially, this bill supports the $85 billion of cuts as a result of the sequester which took place at the beginning of March. Although there were some slight modifications made, interestingly, the House also passed the so-called “Ryan Budget Bill” by a vote of 221 to 207 (basically along party lines as only 10 Republicans were part of the 207 and no Democrats were part of the 221). This bill stands absolutely no chance of passing in the Senate, and in reality, it really doesn’t make a lot of sense. Why? One of the major provisions is the elimination of Obama Care. We are now three years into the changes in health care as the result of Obama Care and the Supreme Court has agreed that it is Constitutional. Like it or not, it is the law of the land. While there are certainly things in Obama Care that can and should be tweaked, there is virtually no chance that the bill is going to be repealed. Therefore, Ryan’s budget bill is not realistic.
- But, let’s return to some of the tweaks to the sequester budget. It’s hard to believe it’s 1,000 pages long. And we are sure every member of Congress read every page and understood it completely! Government meat inspectors were given enough money to avoid being furloughed, which helped ensure we don’t end up like some countries in Europe who are wondering how horse meat got into the system. In an effort to ensure that members of the armed services who are in school did not have their assistance cut, the Pentagon was ordered to continue the Tuition Assistance Program. The Post Office was told it could not stop delivering mail on Saturdays, which means they will have even bigger deficits next year. Guess who will pay for that at the end of the day anyway? Some of the “gifts” seemed meaningless, as the National Institute of Health is losing $1.5 billion due to sequestration, but Congress gave them back an additional $71 million for medical research. How generous.
- For the second straight year, crop insurance claims hit a new record with $16 billion of claims for 2012. There are a lot of critics to farm subsidies and similar programs. While we are the first to admit that there may be inefficiencies, the fact is that the drought over the past couple of years has devastated many farmers across the country. This is not a good thing as the U.S has been independent and a food producer for most of our history. That’s not to say we don’t import items, but on an overall basis, we do quite well. The implications of the two year drought go well beyond the merits of a federal safety net. If the trend were to continue as a worldwide phenomenon, it could seriously shift the balance of who produces food and where food is produced. This could lead to civil unrest in some places in the world and perhaps huge opportunities in other places. In the meantime, it’s hard to argue with the disaster consequences to our American farming communities due to the droughts over the past couple of years.
- As we began 2013 America was looking ahead to President Obama’s second term, the passage of a tax bill that raised government revenue significantly, discovering that fourth quarter growth was virtually flat, corporate earnings that had only a few mild surprises to the upside and several to the downside, and finally, an increase in Social Security taxes of 2%. Then the sequester kicked in in early March, a band aid was used to patch the government together until the end of September, and we saw the nervousness the European markets, highlighted by Cyprus.
- What can we learn from the situation in Cyprus? Can a nation that has such a small amount of gross domestic product really be the linchpin that drags down Europe and the euro? The answer is “absolutely not.” But, it can give everyone pause. Essentially, the bailout program allows depositors to keep 100% of the amount that is insured, which is €100,000 euro (approximately $128,000). But there is a tax on all euros above that. Perhaps another way of saying it is that a percentage of everything above the insured amount is being confiscated, making the depositors pay for a part of the bailout. They do get stock in the bank in exchange. There has been a lot of speculation that this small country has had such large deposits because it is routinely used by Russians to launder money. We don’t know if that is true or not, but it is clear that Russia is not happy with the proposed plan. It is a warning sign, however, to depositors in other countries with fiscal issues, like Spain and Italy. Depositors share/spread the money around in banks so that the deposits are insured to the greatest extent possible. It may even require some Europeans to spread their money throughout Europe and perhaps even overseas. It should be a reminder to the U.S. that, notwithstanding that remaining banks seem to have fiscal soundness and stability, it is foolhardy to keep more than the insured amount in any one bank. By the way, it is safe to say that depositors in the U.S. are being “taxed” as well, but it’s much more subtle. With the very low, almost non-existent interest rates being paid by banks today even on CDs of reasonable length, investors are not even making enough money to keep up with inflation, and they are certainly not earning enough to keep up with inflation and taxes. This too is a subtle form of confiscation because the banks are still able to lend the money out and make profits which allows them to rebuild their balance sheets while being paid for on the backs of depositors.
- Ever since 1996 Golf Digest has produced what it refers to as the “GD 50”; the top 50 golfers based on earnings both on and off the course. Over the years, there have been about 120 golfers who made the list, and as you can imagine, some made every list every year. They include long-time greats such as Arnold Palmer, Jack Nicholas, and Gary Player. It should not be too surprising to realize that Tiger Woods made each and every list, also. When the first list came out, Tiger’s 1996 total earnings were $13.1 million. Not bad for a kid in his early 20s. He topped out at $122.7 million in 2007, just before his personal problems became public, along with the economy hitting the skids. Last year, he was number one on the list with $86.1 million. Add up his 16 years of on and off course earnings, and you come to a cool $1.233 billion, but with only $143.1 million coming from tournament winnings. Not bad work if you can get it. Given his fast start in 2013, it will not surprise too many people that he will again top the list this year.
- Danger Will Robinson! Danger Will Robinson! For those of you old enough to know who Will Robinson was, and yes, we’re talking about the TV show, Lost In Space. This is a warning about a new scam. The other evening, we personally experienced a phone call from Microsoft that explained to us that our computer was sending out signals that it had been infected with a dangerous virus. Fortunately, Microsoft received these signals and wanted to “fix” it for us. All we had to do was to let Microsoft have access to our computer for just a few minutes and they would take all of the virus away. Needless to say, it was a scam, but we decided to have a little fun. We played dumb and naïve and asked them questions while they came back to explain in very basic terms why it was extremely important that we give them access to our computer. Please be on the lookout for these types of phone calls. Unfortunately, there will be people who will allow access, and zappo, everything on their computer will be compromised.
- Very Important Reminder! Anyone who is going to make a contribution to a regular IRA, a non-deductible IRA, or a Roth IRA for 2012 has until April 15th to do so. However, we need time to process the contribution. Please have any checks for IRA contributions to our office no later than Friday, April 12th. We can then Federal Express the payment to wherever it needs to go so that it is deposited no later than the 15th. Needless to say, earlier is even better. Thank you for your understanding.
As always, we encourage you to give us a call if you would like to discuss anything further. We will visit again soon. Proudly and successfully serving our clients for over 26 years.
RAY, KIM, ERIC, BRUCE, LOU, NANCY, TINA, JON, STEVE, and DOROTHY
© 4/1/13 ProVise Management Group, LLC
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