Provise Bullets

The 3rd quarter is now behind us and the major indexes did not fare well through the dog days of the summer. For the quarter the S&P 500 was down 6.44%, the DJIA was down even more at 6.91%, the Russell 2000 was down 11.92%, and the MSCI EAFE index was down 10.23%. The Barclays Aggregate Bond Index was able to post a small gain of 1.23%. Year to date the indexes are -5.29%, -6.88%, -7.73%, -5.28% and +1.13% respectively. As disappointing as these benchmark returns were, a look behind the scenes reveals an even more somber picture. In examining the details behind the S&P 500, we find that for the quarter 392 stocks declined with only 108 advancing. Of those stocks which declined, 157 were down between 10–20% and 88 were down over 20%. Applying the same analysis on a year to date basis reveals 354 stocks declining with only 146 advancing. Of those stocks which declined, 99 fell between 10–20% and 141 fell over 20%. Thus, it was a relatively small basket of stocks that kept the benchmarks from posting even more discouraging results. For quite some time we have commented that the market was overdue for a correction of 10% or more and we finally got it. While it never feels good while it is happening, a correction is healthy for the market in the long term and is a natural part of the process.

A poor showing for earnings in both the first and second quarter, China, ISIS, Russia, Europe (especially Greece’s situation), Japan, the Fed, Congress, depressed oil prices, summer, and many other factors could all be blamed and certainly contributed to varying degrees. In spite of it all, however, the final GDP for the second quarter was increased to 3.9%, unemployment is almost down to 5%, consumer confidence is up, housing is still moving forward with new sales, more than 200,000 people per month have been employed this year (August number due this Friday), corporate and personal balance sheets continue to strengthen, and the government probably ran the lowest annual deficit in years (although still too high). In short, you can be a bull or a bear and make a credible case for the state of the economy. It should come as no surprise that we remain confident in the American economy for the long term.

We can’t help but comment about the Fed’s decision at its last meeting to hold rates stable. We think the Fed lost a good opportunity to raise rates in September, but it wasn’t a “mistake” as many have claimed. There is little doubt that the odds are very high for a December rate increase of 25 basis points. Listen to what Chair Yellen said just last week at Amherst College, “This expectation (that the economy will be okay and inflation will expand), coupled with inherent lags in the response of real activity and inflation to changes in monetary policy, are the key reasons that most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our two percent objective”. Yes, she left some wiggle room, but she is making it clear that the Fed is, for all intents and purposes, ready to move forward.

As we have said in the past, this is not a bad thing, it is a good thing. The Fed believes that the economy is healthy enough to absorb this minor increase. So do we. This is not the end of the world. Our economy has thrived with higher rates. It is healthier to eventually have a 4% 10-year treasury rate than the current 2.2% rate. It gives individual savers additional income, eventually giving them more money to spend. Companies increased their bottom line before at these levels and they can do it again. Banks can actually make money again being banks. Bonds can once again provide income to investors that is meaningful. We hope that the hint Yellen gave in the quote above about raising rates at a “gradual pace” comes to fruition as we are more concerned about the speed at which interest rates are increased than the increase itself. In the words of Nike, “just do it”!

· Right now, seniors in high school are getting ready to fill out applications for college enrollment next fall. It is an exciting yet stressful time for these young adults. There is little doubt that those who go to college will fare better economically than their counterparts who do not go to college. But are all colleges equal in their return on the large investment that is made to attend? The answer is obviously “no”, but you may be surprised to learn about the disparity. The Obama administration has set up a website (https://collegescorecard.ed.gov) which provides a wealth of information. You can sort by location, degree, size of school, etc. While the site is far from perfect, it would be worthwhile to do a little investigation.

· Several weeks ago we suggested that the chance of the Federal Reserve Board increasing interest rates at the September meeting was only 50/50 and that there was a 75% chance they would do so in December. Well, as most everyone knows the Fed did not increase interest rates at its most recent meeting. At first the market took a downward turn, then it went up and down again when Chair Yellen announced that a majority of the Board was in favor of a December hike. The following day was terrible with the DJIA dropping almost 300 points. There was a lot of pressure from around the world for the Fed to hold the line with just about every corner of globe saying, “please don’t”. Although the Fed shouldn’t be listening, they can’t totally ignore the global community. Our economy is still in reasonable shape even with all of negatives. We expect a slow grind forward in spite of it all.

· Two new polls show that Americans are more confident about having enough for retirement than they were two years ago. State Street Global Advisors commissioned a survey that included several countries. In the US, some 51% (only 21% in 2013) said they were extremely confident that they would attain their retirement goals. Frankly, we think many of these folks are kidding themselves when they use the word "extremely" and they may be in for a rude disappointment when they get to retirement. In another survey, which we find more credible, the Employee Benefit Research Institute and Greenwald Associates found that 22% of workers felt they would have a comfortable retirement which is up from 13% in 2013. Not too surprisingly, those households that had a retirement plan at work and/or had an IRA of their own were more likely to be in this positive category.

· In spite of lackluster results from the equity markets during the first six months of the year, Americans’ net worth climbed by $694.8 billion to stand at a total of $85.7 trillion. Leading the way was an increase of $499 billion in real estate prices, while financial assets added another $299 billion. This increased wealth was offset somewhat by debt which increased during the second quarter at a 3.9% annualized basis. (Source: Federal Reserve)

· Here is a solution for state governments that find themselves in trouble (can you say "Illinois"?). According to the state of Colorado, the retail cost of marijuana may not be too high as it is subject to competitive pressures from many suppliers, but the tax on the purchase is something to behold. As you might expect there is a state sales tax of 2.9%, plus there is a local sales tax that varies from place to place. Ah, but then the state has a specific sales tax just for marijuana of another 10%. Did we forget to mention that the state also has an excise tax on marijuana of 15%? Thus, the minimum tax is 27.9%. Put that in your pipe and smoke it.

· While most employees focus on their salaries and bonuses, these two items only represent 68% of total employee cost for private sector businesses. The other 32% is for various benefits that are either legally required (i.e. Social Security and Medicare taxes) or are simply provided to attract and retain workers, including insurance, retirement plans and paid leave. (Source: Labor Department)

· The good news about capital gains tax is that it implies that you made money from an investment. The bad news is that you have to share that profit with the government, and for those with significant income it could be as high as 24%, including the ObamaCare tax. This tax also applies to qualified dividend income. However, for those in the 15% bracket, the tax on capital gains and dividends is 0%. The upper range of this tax bracket is $74,900 of taxable income for a married couple filing jointly and $37,450 for a single taxpayer. Are you surprised it is that high and still no tax? There is even more good news. This is taxable income which is calculated after personal exemptions and deductions. Thus, it might be possible for a single taxpayer to have a gross income of $40-50,000 and a married couple perhaps as much as $90,000 and still pay 0% on capital gains. Tax planning must always be a part of an investor's decision making. Remember, however, that paying capital gain taxes is a timing and financial planning decision as there are only three ways to totally avoid them if you are above the 15% bracket. First, you can give the appreciated asset away to charity and move it from your balance sheet to the charity's. Next, you can die and take advantage of the step up in basis such that the heirs do not have to pay the capital gains tax. Lastly, you can hold on to the asset and hope it declines in value and goes back down to what you paid for it in the first place. These choices have a negative implication in varying degrees. As is always the case, an investor wants to make good investment decisions first rather than making decisions based solely on tax implications.

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 29 years.

RAY, ERIC, KIM, BRUCE, LOU, NANCY, TINA, JON, STEVE, DOROTHY and PAUL

©10/1/15 ProVise Management Group, LLC

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