Kim 7/21/16 Kim 7/21/16

The Rise of the Fee-Based Financial Professional

A huge shift is underway, with the client in mind. A wave of change is transforming the financial services profession. The shift has been gradual, but noticeable. Increasingly, financial professionals are choosing to be compensated, partly or wholly, through fees rather than through commissions.

This is a real change from the old status quo. In the days before the Internet and gourmet coffee on every corner, compensation usually resulted from product sales. A client opened up an investment, and the broker who “sold” that investment received a commission as an outcome.

The more informed an investor was, the more he or she tended to be cynical about this arrangement. It was all too easy for a client to regard the registered representative on the other side of the table as a salesperson, rather than a consultant or an advisor.

The presence of commissions also raised the potential for conflicts of interest. While ethical standards demanded that the representative suggest or present investments suitable for the client, certain suitable investments could mean a larger commission for the representative than others.

Before going further, it must be noted that this is not as simple as “fees good, commissions bad.” In some cases, an investor may be better served when a financial professional is compensated largely through commissions, or a mix of fees and commissions. In terms of services rendered, that kind of arrangement may be more cost-effective for the client.

On the whole, though, the profession is moving toward a fee-based business model. In this compensation structure, a representative is paid mostly in fees that equal a small percentage of client assets under management. In addition, he or she may charge hourly or per-project fees.

A new retirement account rule is encouraging the shift. The Department of Labor is implementing a fiduciary standard for financial professionals who consult IRA owners or participants in workplace retirement plans. Beginning in 2017 (2018, for IRAs), financial professionals and their firms will be asked to commit to that standard (with certain exceptions).¹

Many fee-only and fee-based financial practitioners already abide by a fiduciary standard. Registered Investment Advisors (RIAs) and others who work under this standard have an ethical and legal obligation to put the client’s interests ahead of their own.²

For decades, many registered representatives have made thoughtful and conscientious investment recommendations under the suitability standard, by which any suggested investment must be suitable for a client’s needs and objectives. It is no longer an argument of which standard is better, however; the Department of Labor will soon require fiduciary care for all retirement accounts.

Many more financial professionals could soon be fee-based. A small percentage are actually fee-only now, meaning that they earn 100% of their income in fees. The DoL rule change is helping to push the industry in this direction, as well as a priority on client relationships.

Decades ago, an inherent problem plagued the traditional, commission-driven brokerage compensation model: the broker did not profit unless the client bought something. That reality affected the client relationship. Even now, traces of this longstanding structural problem linger.

In a fee-based or fee-only relationship, the emphasis is on financial guidance and investment management rather than product sales. Investment management fees are typically based on account values, and both the client and the financial practitioner want the account to grow. Their interests are closely aligned; they can see each other as partners in the effort to build and sustain the client’s invested assets under management.

This business is relationship-oriented; it must be for mutual success. Increasingly, financial services industry professionals are operating fee-based or fee-only practices with the goal of enhancing existing client relationships and forging new ones.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - money.usnews.com/money/blogs/planning-to-retire/articles/2016-04-08/the-new-retirement-account-fiduciary-standard [4/8/16]

2 - forbes.com/sites/peterlazaroff/2016/04/06/the-difference-between-fiduciary-and-suitability-standards/print/ [4/6/16]

Kim 7/13/16 Kim 7/13/16

Why the Brexit Should Not Rattle Investors

Wall Street has rebounded so many times, so quickly. Uncertainty is the hobgoblin of financial markets. Right now, investors are contending with it daily as the European Union contends with the United Kingdom’s apparent exit.

Globally, many institutional investors have responded to this uncertainty by selling. Should American retirement savers follow their lead?

They may just want to wait out the turbulence.

The Brexit vote was a disruption for Wall Street, not a new normal. Yes, it could mean a “new normal” for the European Union – but the European Union is not Wall Street. Stateside, investors respond to domestic economic and geopolitical indicators as much as foreign ones, perhaps more.

As Wells Fargo (WFC) Investment Institute head global market strategist Paul Christopher remarked to FOX Business on June 24, “We’re getting used to the shock of the vote and [the] surprise. But does it change anything fundamentally about the market? No.”1

Central banks may respond to make the Brexit more bearable. They are certainly interested in restoring confidence and equilibrium in financial markets.

Post-Brexit, there is no compelling reason for the Federal Reserve to raise interest rates this summer, or during the rest of 2017. You may see the European Central Bank take rates further into negative territory and further expand its asset-purchase program. The Bank of England could respond to the Brexit challenge with quantitative easing of its own, and interest rate cuts.

“There is no sense of a financial crisis developing,” U.S. Treasury Secretary Jack Lew told CNBC on June 27. Lew called the global market reaction “orderly,” albeit pronounced.2

The market may rebound more quickly than many investors assume. Ben Carlson, director of Institutional Asset Management at Ritholtz Wealth Management, reminded market participants of that fact on June 24. He put up a chart on Twitter from S&P Capital IQ showing the time it took the S&P 500 to recover from a few key market shocks. (Sam Stovall, U.S. equity strategist at S&P Global Market Intelligence, shared the same chart with MarketWatch three days later.)3,4

The statistics are encouraging. After 9/11, the market took just 19 days to recover from its correction (an 11.6% loss). The comeback from the “flash crash” of 2010 took only four days.

Even the four prolonged market recoveries noted on the chart all took less than ten months: the S&P gained back all of its losses within 257 days of the attack on Pearl Harbor, within 143 days of Richard Nixon’s resignation, within 223 days of the 1987 Black Monday crash, and within 285 days after Lehman Brothers announced its bankruptcy. The median recovery time for the 14 market shocks shown on the chart? Fourteen days.3,5

The S&P sank 3.5% on June 24 following the news of the Brexit vote – but that still left it 11% higher than it had been in February.5

The Brexit is a political event first, a financial event second. Political issues, not economic ones, largely drove the Leave campaign to its triumph. As Credit Suisse analysts Ric Deverell and Neville Hill wrote in a note to clients this week, “This is not a shock on the scale of Lehman Brothers’ bankruptcy in 2008 or, if it had happened, a disruptive Greek exit from the euro, in our view. Those types of events deliver an immediate devastating shock to the global financial architecture that, in turn, have a powerfully negative impact on economic activity.” Aside from the political drama of the U.K. exiting the E.U., in their opinion “nothing else has changed.”4

The Brexit certainly came as a shock, but equilibrium should return. Back in 1963, the admired financial analyst Benjamin Graham made a statement that still applies in 2016: “In my nearly fifty years of experience in Wall Street, I’ve found that I know less and less about what the stock market is going to do, but I know more and more about what investors ought to do.”6

Graham was making the point that investors ought to stick to their plans through periods of volatility, even episodes of extreme market turbulence. These disruptions do become history, and buying opportunities do emerge. Wall Street has seen so few corrections of late that we have almost forgotten how eventful a place it can be. The Brexit is an event, one of many such news items that may unnerve Wall Street during your lifetime. Eventually, equilibrium will be restored, and, as the historical examples above illustrate, that can often happen quickly.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - foxbusiness.com/markets/2016/06/24/after-brexit-carnage-should-rejigger-your-investment-portfolio.html [6/24/16]

2 - time.com/4383915/brexit-treasury-secretary-jack-lew-financial-crisis/ [6/26/16]

3 - tinyurl.com/jx2brl3 [6/24/16]

4 - marketwatch.com/story/brexit-vote-more-a-political-than-a-financial-one-and-thats-important-2016-06-27 [6/27/16]

5 - equities.com/news/what-does-brexit-mean-for-individual-investors [6/27/16]

6 - blogs.wsj.com/moneybeat/2016/06/24/the-more-it-hurts-the-more-you-make-investing-after-brexit/ [6/24/16]

Kim 6/29/16 Kim 6/29/16

The Brexit Shakes Global Markets

A worldwide selloff occurs after the United Kingdom votes to leave the European Union. A wave of anxiety hit Wall Street Friday morning. Thursday night, the United Kingdom elected to become the first nation state to leave the European Union. The “Brexit” can potentially be finalized as soon as the summer of 2018.¹

Voters in England, Scotland, Wales, and Northern Ireland were posed a simple question: “Should the United Kingdom remain a member of the European Union or leave the European Union?” Seventy-two percent of the U.K. electorate went to the polls to answer the question, and in the final tally, Leave beat Remain 51.9% to 48.1%.^2,3

The vote shocked investors worldwide. The threat of a Brexit was supposed to have decreased. As late as Thursday, key opinion surveys showed the Remain camp ahead of the Leave camp – but at 10:40pm EST Thursday, the BBC called the outcome and projected Leave would win.⁴

Why did Leave triumph? The leaders of the Leave campaign hammered home that E.U. membership was a drag on the U.K. economy. They criticized E.U. regulations that impeded business growth. They felt that the U.K. should no longer contribute billions of pounds per year to the E.U. budget. They had concerns over E.U. immigration laws, which permit free movement of people among E.U. nations without visas.¹

Financial markets were immediately impacted. The pound fell almost 11% Thursday night to a 31-year low, and the benchmark U.K. equities exchange, the FTSE 100, slipped 5% after initially diving about 8%. Germany’s DAX exchange and France’s CAC-40 exchange respectively incurred losses of 7% and 9%. In Tokyo, the Nikkei 225 closed nearly 8% lower, taking its largest one-day slide since 2008.⁵

Stateside, S&P 500 and Nasdaq Composite futures declined more than 5% overnight; that triggered the Chicago Mercantile Exchange’s circuit breaker, briefly interrupting trading. The Chicago Board Options Exchange Volatility Index, or CBOE VIX, approached 24 after midnight. The price of WTI crude fell more than $2 in the pre-dawn hours.^5,6

At the opening bell Friday, the Dow Jones Industrial Average was down 408 points. The Nasdaq shed 186 points at the open; the S&P, 37 points.⁷

Fortunately, the first trading day after the Brexit referendum was a Friday, giving Wall Street a pause to absorb the news further over the weekend.

How could the Brexit impact investors & markets going forward? Consider its near-term ripple effect, which could be substantial.

The Brexit could deal a devastating blow to both the United Kingdom and the European Union. Depending on which measurements you use, the E.U. collectively represents either the first or third largest economy in the world. In terms of international trade, its import and export activity surpasses that of China (and that of the United States).²

An analysis by the U.K.'s Treasury argued that the country would be left “permanently poorer” by the Brexit, with less tax revenue and lower per-capita GDP and productivity. The Brexit certainly hurt the U.K.’s major trading partners, which include China, India, Japan, and the United States. Some Chinese and American companies have established operations in the U.K. specifically to take advantage of its E.U. membership and the free trade corridors it opens. With the U.K. exiting the E.U., the profits of those firms may be reduced – and the U.K. will have to quickly negotiate new trade deals with other nations. The most recently available European Commission data shows that in 2014, U.S. direct investment in the E.U. topped €1.8 trillion (roughly $2 trillion), with a slightly greater amount flowing back to the U.S.²

You could also see a sustained flight to the franc, the yen, and the dollar in the coming weeks. The stronger the dollar becomes, the weaker the demand for American exports.

Investors should hang on through the turbulence. The Brexit is a historic and unsettling moment, but losses on Wall Street should be less severe than those happening overseas. Retirement savers should not mistake this disruption of market equilibrium for the state of the market going forward. A year, a month, or even a week from now, Wall Street may gain back all that was lost in the Brexit vote’s aftermath. It has recovered from many events more dramatic than this.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - bbc.com/news/uk-politics-32810887 [6/23/16]

2 - cnbc.com/2016/06/21/uk-brexit-what-you-need-to-need-to-know.html [6/24/16]

3 - bbc.com/news/politics/E.U._referendum/results [6/23/16]

4 - bbc.com/news/live/uk-politics-36570120 [6/23/16]

5 - nytimes.com/aponline/2016/06/24/world/asia/ap-financial-markets.html [6/24/16]

6 - rE.U.ters.com/article/us-usa-stocks-idUSKCN0Z918E [6/24/16]

7 - marketwatch.com/story/us-stocks-open-sharply-lower-joining-global-post-brexit-selloff-2016-06-24 [6/24/16]

Kim 6/22/16 Kim 6/22/16

Do Women Face Greater Retirement Challenges Than Men?

If so, how can they plan to meet those challenges? A new study has raised eyebrows about the retirement prospects of women. It comes from the National Institute on Retirement Security, a non-profit, non-partisan research organization based in Washington, D.C. Studying 2012 U.S. Census data, NRIS found that women aged 65 and older had 26% less income than their male peers. Looking at Vanguard’s 2014 fact set on its retirement plans, NRIS learned that the median retirement account balance for women was 34% less than that of men.1

Alarming numbers? Certainly. Two other statistics in the NRIS report are even more troubling. One, a woman 65 or older is 80% more likely to be impoverished than a man of that age. Two, the incidence of poverty is three times as great for a woman as it is for a man by age 75.1,2

Why are women so challenged to retire comfortably? You can cite a number of factors that can potentially impact a woman’s retirement prospects and retirement experience. A woman may spend less time in the workforce during her life than a man due to childrearing and caregiving needs, with a corresponding interruption in both wages and workplace retirement plan participation. A divorce can hugely alter a woman’s finances and financial outlook. As women live longer on average than men, they face slightly greater longevity risk – the risk of eventually outliving retirement savings.

There is also the gender wage gap, narrowing, but still evident. As American Association of University Women research notes, the average female worker earned 79 cents for every dollar a male worker did in 2014 (in 1974, the ratio was 59 cents to every dollar).3

What can women do to respond to these financial challenges? Several steps are worth taking.

Invest early & consistently. Women should realize that, on average, they may need more years of retirement income than men. Social Security will not provide all the money they need, and, in the future, it may not even pay out as much as it does today. Accumulated retirement savings will need to be tapped as an income stream. So saving and investing regularly through IRAs and workplace retirement accounts is vital, the earlier the better. So is getting the employer match, if one is offered. Catch-up contributions after 50 should also be a goal.

Consider Roth IRAs & HSAs. Imagine having a source of tax-free retirement income. Imagine having a healthcare fund that allows tax-free withdrawals. A Roth IRA can potentially provide the former; a Health Savings Account, the latter. An HSA is even funded with pre-tax dollars, as opposed to a Roth IRA, which is funded with after-tax dollars – so an HSA owner can potentially get tax-deductible contributions as well as tax-free growth and tax-free withdrawals.4

IRS rules must be followed to get these tax perks, but they are not hard to abide by. A Roth IRA need be owned for only five tax years before tax-free withdrawals may be taken (the owner does need to be older than age 59½ at that time). Those who make too much money to contribute to a Roth IRA can still convert a traditional IRA to a Roth. HSAs have to be used in conjunction with high-deductible health plans, and HSA savings must be withdrawn to pay for qualified health expenses in order to be tax-exempt. One intriguing HSA detail worth remembering: after attaining age 65 or Medicare eligibility, an HSA owner can withdraw HSA funds for non-medical expenses (these types of withdrawals are characterized as taxable income). That fact has prompted some journalists to label HSAs “backdoor IRAs.”4,5

Work longer in pursuit of greater monthly Social Security benefits. Staying in the workforce even one or two years longer means one or two years less of retirement to fund, and for each year a woman refrains from filing for Social Security after age 62, her monthly Social Security benefit rises by about 8%.6

Social Security also pays the same monthly benefit to men and women at the same age – unlike the typical privately funded income contract, which may pay a woman of a certain age less than her male counterpart as the payments are calculated using gender-based actuarial tables.7

Find a method to fund eldercare. Many women are going to outlive their spouses, perhaps by a decade or longer. Their deaths (and the deaths of their spouses) may not be sudden. While many women may not eventually need months of rehabilitation, in-home care, or hospice care, many other women will.

Today, financially aware women are planning to meet retirement challenges. They are conferring with financial advisors in recognition of those tests – and they are strategizing to take greater control over their financial futures.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - bankrate.com/financing/retirement/retirement-women-should-worry/ [3/1/16]

2 - blackenterprise.com/small-business/women-age-65-are-becoming-poorest-americans/ [3/18/16]

3 - tinyurl.com/jq5mqhg [6/8/16]

4 - bankrate.com/finance/insurance/health-savings-account-rules-and-regulations.aspx [1/1/16]

5 - nerdwallet.com/blog/investing/know-rules-before-you-dip-into-roth-ira/ [1/29/16]

6 - fool.com/retirement/general/2016/05/29/when-do-most-americans-claim-social-security.aspx [5/29/16]

7 - investopedia.com/articles/retirement/05/071105.asp [6/16/16]

Kim 6/13/16 Kim 6/13/16

Sometimes the Pundits Get It Wrong

In fact, many predictions about Wall Street have misread the market’s direction. Trying to determine how Wall Street will behave next week, next month, or next year is difficult. Some feel it is impossible. To predict the near-term direction of the market, you may also need to predict upcoming earnings seasons, central bank policy moves, and the direction of both the domestic and global economy. You might as well forecast the future of the world.

That is not to say forecasting is useless. You could even argue that it is a necessity. Every month, economists are polled by various news outlets that publish their median forecasts for hiring, inflation, personal spending, and other economic indicators. Those median forecasts are often close to the mark, and sometimes exactly right.

Figuring out what lies ahead for equities, however, is often a guessing game. Looking back, some very bold predictions have been made for the market – some way off the mark.

Dow 30,000! More than a decade ago, a few analysts boldly forecast that the Dow Jones Industrial Average would climb to astonishing heights – heights the index has yet to reach today.

The first was investment manager Harry Dent, who, to his credit, had written a book called Great Boom Ahead predicting an amazing run for both the economy and the market starting in the mid-1990s. (Indeed, the S&P 500 averaged a yearly gain of almost 29% during 1995-99.) Dent’s 1999 bestseller, The Roaring 2000s, posited that the Dow would top 30,000, perhaps 35,000 in the near future as maturing baby boomers poured money into equities. He was wrong. What happened instead was the so-called “lost decade,” in which the broad market basically did not advance. As for the Dow 30, it ended the 2000s at 11,497.12.^1,2

As a money manager, Robert Zuccaro had been part of a team that had realized triple-digit annual returns in the late 1990s. He put out a book soon afterward called Dow 30,000 by 2008: Why It’s Different This Time. (As the market cratered in 2008, you might say his timing was bad.) Analysts James K. Glassman and Kevin A. Hassett authored a volume called Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market. It came out in 2000, and also proved overly optimistic.^2,3

Dow 3,300! Harry Dent changed his outlook over time. In 2011, he told the Tampa Bay Times that the blue chips would plunge to that dismal level by 2014 or earlier. The Dow finished 2014 at 17,823.07. For the record, Dent now sees a “bubble collapse” starting in 2016 or 2017, soon breeding “widespread civil unrest” in America.^2,4

Sell your shares now! In “Bearish on America,” a 1993 Forbes cover story, Morgan Stanley analyst Barton Biggs urged investors to dump their domestic shares en masse in light of the economic policies favored by a new presidential administration. The compound return of the S&P 500 over the next seven years: 18.5%.⁵

The market is done, no one believes in it! Perhaps the most famous doomsday call of all time occurred in 1979 when Business Week published a cover story entitled “The Death of Equities.” Wall Street was emerging from its second awful bear market in less than seven years. The article cited a widespread loss of faith among investors, asserting that “the death of equities is a near permanent condition.” Equities, so to speak, soon proved very much alive: the S&P 500 returned 21.55% in 1982, 22.56% in 1983, 6.27% in 1984, 31.73% in 1985, and 18.67% in 1986.^5,6

Recession ahead, the market points the way! Can the behavior of the market foretell a recession? Is there a causal relationship between a down or sideways market and an oncoming economic slump? Some analysts see little or no link. Fifty years ago in Newsweek, the noted economist Paul Samuelson wrote that the equity markets had “forecast nine of the past five recessions.” He was being sardonic, but he had a point. Looking back from 2016 to 1945, Wall Street has seen 13 bear markets, only seven of which (53%) have seen a recession begin within about a year of their onset.^7,8

Take the words of the pundits with a grain of salt. Some have been right, but many have been wrong. While the most radical market predictions may make good copy, they may also lead investors to take bad advice.⁵

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - cbsnews.com/news/harry-dent-and-the-chamber-of-poor-returns/ [8/19/13]

2 - finance.yahoo.com/q/hp?s=^DJI&a=11&b=29&c=1999&d=11&e=31&f=2014&g=d [6/2/16]

3 - dividend.com/how-to-invest/10-hilariously-wrong-bullbear-calls/ [1/19/15]

4 - tampabay.com/news/business/markets/economic-naysayers-including-tampas-harry-dent-are-back-with-fresh-reports/2270981 [3/28/16]

5 - forbes.com/sites/katestalter/2015/09/14/6-doomsday-predictions-that-were-dead-wrong-about-the-market/ [9/14/15]

6 - forbes.com/sites/oppenheimerfunds/2014/01/23/clues-from-the-80s-bull-run/ [1/23/14]

7 - cnbc.com/2016/02/04/can-the-markets-predict-recessions-what-we-found-out.html [2/4/16]

8 - blogs.wsj.com/economics/2013/10/03/plunging-stock-prices-are-good-recession-predictor/ [10/3/13]

Kim 6/13/16 Kim 6/13/16

The Things Most Likely to Kill Us

What are the biggest risks to our lives? Some are overblown. What are the major risks to our lives? If we look at the statistics of what claims lives, some of our collective fears look unfounded.

According to the Centers for Disease Control’s most recent tally, 614,438 Americans died of heart disease in 2014, and another 591,699 from cancer. Chronic lower respiratory diseases (not including the flu and pneumonia) took 147,101 lives in that year, while 136,053 people died accidental deaths. Strokes claimed 133,103 lives, Alzheimer’s disease 93,541 more and diabetes another 76,488. Those were America’s leading causes of death.¹

Notice what that list did not include. It did not include war, terrorism, murder, plane crashes, natural disasters, or the Zika or Ebola viruses. Many of us fear these things, but they are hardly prominent causes of American mortality. Our perception of risk may be skewed. You may know someone who is afraid to fly, but who consistently smokes. You may know someone who fears dying in a terrorist attack, yet drives aggressively and recklessly on the freeway.

Note also that many of the mortality causes on the CDC list may be preventable. Lifestyle choices may help us avoid certain forms of cancer, diabetes, stroke, or lung and heart disease.

Depression is a comparatively underpublicized risk to our lives. In 2014, CDC statistics show that 42,773 Americans died from suicide or forms of “intentional self-harm.” Suicide was the tenth biggest killer in America that year.¹

Medical errors may pose a major risk. The medical professionals who treat us are only human, and they can make mistakes. How often do serious mistakes occur? Far too often, according to a team of researchers at Johns Hopkins University’s School of Medicine. This year, that research team published a study in The BMJ (formerly, The British Medical Journal) critiquing the CDC’s figures, asserting that medical mistakes actually represent America’s third-leading cause of death. The CDC’s National Center for Health Statistics does not list doctor and hospital errors as a cause of death, but the researchers estimate that these lapses result in more than 250,000 deaths a year.²

We don’t know exactly when or how we will die, so we can only strive to live well. Avoiding addiction, eating enough fruits and vegetables, controlling our sugar and fat intake; these are all things we are capable of doing. Rather than worry about what might take our lives, we can take better care of ourselves to sustain our health and quality of life.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - cdc.gov/nchs/fastats/leading-causes-of-death.htm [4/27/16]

2 - newsok.com/article/5496838 [5/7/16]

Kim 4/5/16 Kim 4/5/16

Money Concerns for Those Remarrying

What financial factors deserve attention?

Some of us will marry again in retirement. How many of us will thoroughly understand the financial implications that may come with tying the knot later in life?

Many baby boomers and seniors will consider financial factors as they enter into marriage, but that consideration may be all too brief. There are significant money issues to keep in mind when marrying after 50, and they may be important enough to warrant a chat with a financial professional.

You might consider a prenuptial agreement. A prenup may not be the most romantic gesture, but it could be a very wise move from both a financial and estate planning standpoint. The greater your net worth is, the more financial sense it may make.

If you remarry in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin), all the money that you and your spouse will earn during your marriage will be considered community property. The same goes for any real property that you happen to purchase with those earnings. Additionally, these states often regard extensively comingled separate property as community property, unless property documentation or evidence exists to clarify separate origin or status.¹

A prenuptial agreement makes part or all of this community property the separate property of one spouse or the other. In case of a divorce, a prenup could help you protect your income, your IRA or workplace retirement plan savings, even the appreciation of your business during the length of your marriage (provided you started your business before the marriage began).^1,2

A prenup and its attached documents lay everything bare. Besides a core financial statement, the support documentation includes bank statements, deeds, tax returns, and (optionally) much more. The goal is to make financial matters transparent and easy to handle should the marriage sour.^1,2

If one spouse discovers that the other failed to provide full financial disclosure when a prenup was signed, it can be found invalid. (A prenup signed under duress can also be ruled invalid.) If a divorce occurs and the prenup is judged worthless, then the divorce will proceed as if the prenup never existed.²

You should know about each other’s debts. How much debt does your future spouse carry? How much do you owe? Learning about this may seem like prying, but in some states, married couples may be held jointly liable for debts. If you have a poor credit history (or have overcome one), your future spouse should know. Better to speak up now than to find out when you apply for a home loan or business loan later. In most instances, laws in the nine community property states define debts incurred during a marriage as debts shared by the married couple.¹

You should review your estate planning. Affluent individuals who remarry have often done some degree of estate planning, or at least have made some beneficiary decisions. Remarriage is as much of a life event as a first marriage, and it calls for a review of those decisions and choices.

In 2009, the Supreme Court ruled that the beneficiary designation on an employer-sponsored retirement plan account overrides any wishes stated in a will. Many people do not know this. Think about what this might mean for an individual remarrying. A woman might want to leave her workplace retirement plan assets to her daughter, her will even states her wish, but the beneficiary form she signed 25 years ago names her ex-husband as the primary beneficiary. At her death, those assets will be inherited by the man she divorced. (That will hold true even if her ex-husband waived his rights to those assets in the divorce settlement.)³

In the event of one spouse’s passing, what assets should the other spouse receive? What assets should be left to children from a previous marriage? Grandchildren? Siblings? Former spouses? Charities and causes? Some or all of these questions may need new answers. Also, your adult children may assume that your new marriage will hurt their inheritance.

Are you a homeowner planning to remarry? Your home is probably titled in the name of your family. If you add your new spouse to the title, you may be opening the door to a major estate planning issue. Joint ownership could mean that the surviving spouse will inherit the property, with the ability to pass it on to his or her children, not yours.⁴

One legal option is to keep the title to your home in your name while giving your new spouse occupancy rights that terminate if he or she dies, moves into an eldercare facility or divorces you. Should any of those three circumstances occur, your children remain in line to inherit the property at your death.⁴

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com

Citations.

1 - nolo.com/legal-encyclopedia/marriage-property-ownership-who-owns-what-29841.html [3/17/16]

2 - blog.credit.com/2015/06/prenup-vs-postnup-which-is-better-117548/ [6/1/15]

3 - tinyurl.com/j8ncltt [9/7/11]

4 - usatoday.com/story/money/columnist/brooks/2014/05/20/retire-baby-boomer-divorce-remarry-pension/9171469/ [5/20/14]

Kim 1/25/16 Kim 1/25/16

When Will Stocks Stabilize?

How deep will this correction ultimately be?

January may prove to be the worst month for stocks in eight years. The S&P 500 just corrected for the second time in five months, and some investors think the bull market may be ending.^1,2

Bull markets do end, and the current one is nearly seven years old, the third longest in history. If a bear market is truly on the horizon, it may not last very long – the 12 bear markets recorded since the end of World War II have averaged 367 days in duration.²

How far would stocks have to fall for a bear market to begin? Should the S&P close at 1,708 or below, you would have an “official” bear market on Wall Street – a 20% fall of that index from its most recent peak. Right now, the S&P is above 1,800.^2,3

While the S&P, Dow Jones Industrial Average, and Nasdaq Composite have all corrected this month, the damage to the small caps has been worse. The Russell 2000 is now in a bear market, off more than 20% from its June 2015 high. On January 20, the MSCI All-Country World index went bear, joining the Nikkei 225, TSX Composite, Hang Seng, and Shanghai Composite.^2,4

Where is the bottom? We may not be there just yet. For the market to stabilize or rebound, institutional investors must accept (or at least distract themselves from) three realities that have been hard for them to stomach...

Oil prices may remain under $50 all year. Earlier this month, the Wall Street Journal asked 12 investment banks to project the average crude oil price across 2016. Their consensus? West Texas Intermediate crude will average $48 in 2016; Brent crude will average $50. Oil price forecasts are frequently off the mark, however – and if the oil glut persists, prices may take months to regain those levels. Saudi Arabia and Russia are not cutting back output, as they want to retain market share. With embargoes being lifted, Iran is set to export more oil. U.S. daily oil output has fallen by only 500,000 barrels since April.⁵

China’s manufacturing sector may never again grow as it once did. Its leaders are overseeing a gradual shift from a robust, manufacturing-centered economy to a still-booming economy built on services and personal consumption expenditures. The nation’s growth rate has vacillated between 4%-15% since 1980, but for most of that time it has topped 8%. In 2015, the Chinese economy grew only 6.9% by official estimates (which some observers question). The International Monetary Fund forecasts growth of just 6.3% for China in 2016 and 6.0% in 2017. Stock and commodity markets react quickly to any sputtering of China’s economic engine.⁶

The Q4 earnings season looks to be soft. A strong dollar, the slumping commodities sector, and the pullback in U.S. stocks have all hurt expectations. A note from Morgan Stanley struck a reasonably positive chord at mid-month, however, stating that “a lowered bar for earnings should be cleared” and that decent Q4 results could act as “a catalyst to calm fears.”⁷

What developments could help turn things around this quarter? OPEC could cut oil output, Chinese indicators could beat forecasts, and corporate earnings could surprise to the upside. If these seem like longshots to you, they also do to economists. Still, other factors could emerge.

Central banks could take further action. Since China’s 6.9% 2015 GDP came in below projections, its leaders could authorize a stimulus. The European Central Bank could increase the scope of its bond buying, and the Federal Reserve could hold off on tightening further in the first half of the year. If this month’s Fed policy statement notes that Fed officials are taking extra scrutiny in light of recent events, it could be reassuring. Any statement that could be taken as “second thoughts” about raising interest rates would not be reassuring.⁶

U.S. GDP could prove better than expected. The Atlanta Fed thinks the economy grew 0.6% in Q4 and Barclays believes Q4 GDP will come in at 0.3%; if the number approaches 1%, it could mean something for investors. Moving forward, if the economy expands at least 2.5% in Q1 and Q2 (which it very well might), it would say something about our resilience and markets could take the cue. Other domestic indicators could also affirm our comparative economic health.⁸

While the drama on Wall Street is high right now, investors would do well not to fall prey to emotion. As Jack Bogle told CNBC on January 20, “In the short run, listen to the economy; don’t listen to the stock market. These moves in the market are like a tale told by an idiot: full of sound and fury, signaling nothing.”⁹

Kim Bolker may be reached at kbolker@sigmarep.com or 61-942-8600. This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - bostonherald.com/business/business_markets/2016/01/market_analyst_believes_stocks_will_rebound_after_correction [1/14/16]

2 - jillonmoney.com/will-stock-correction-lead-to-bear-market/ [1/16/16]

3 - foxbusiness.com/markets.html [1/20/16]

4 - cnbc.com/2016/01/20/msci-global-stock-market-index-hits-bear-market.html [1/20/16]

5 - tinyurl.com/h6ry47n [1/12/16]

6 - bbc.com/news/business-35349576 [1/19/16]

7 - usnews.com/news/articles/2016-01-14/will-corporate-earnings-be-the-stock-markets-savior [1/14/16]

8 - money.cnn.com/2016/01/19/news/economy/global-fears-federal-reserve-rate-hike/ [1/19/16]

9 - cnbc.com/2016/01/20/investing-legend-jack-bogle-stay-the-course.html [1/20/16]

Kim 10/15/15 Kim 10/15/15

Do Our Biases Affect Our Financial Choices?

Even the most seasoned investors are prone to their influence.

Investors are routinely warned about allowing their emotions to influence their decisions. They are less routinely cautioned about letting their preconceptions and biases color their financial choices.

In a battle between the facts & our preconceptions, our preconceptions may win. If we acknowledge this tendency, we may be able to avoid some unexamined choices when it comes to personal finance. So it may actually “pay” us to recognize our biases as we invest. Here are some common examples of bias creeping into our financial lives.

Valuing outcomes of investment decisions more than the quality of those decisions. An investor thinks, “I got a great return off of that decision” instead of thinking, “that was a good decision because ______.”

How many investment decisions do we make that have a predictable outcome? Hardly any. In retrospect, it is all too easy to prize the gain from a decision over the wisdom of the decision, and to therefore believe that the decisions with the best outcomes were in fact the best decisions (not necessarily true).

Valuing facts we “know” & “see” more than “abstract” facts. Information that seems abstract may seem less valid or valuable than information that relates to personal experience. This is true when we consider different types of investments, the state of the markets, and the health of the economy.

On Main Street, we find a classic example in Gallup’s U.S. Economic Confidence Index. In the August edition of this monthly poll of more than 3,500 U.S. adults, 55% of respondents said the American economy is “getting worse” instead of better. In fact, more Americans have told Gallup that the economy is getting worse rather than better since March.¹

This flies in the face of the declining jobless rate, the strong hiring of 2015, the comeback of the housing market, and key surveys showing years of consistent monthly growth in the manufacturing and service sectors – but in all probability, these poll respondents are not looking at economic indicators when they make such a judgment. Their neighbor was laid off, or there was a story on the nightly news about a new homeless camp growing in size. These are facts they can “see” – and therefore, in their minds the economy is getting worse.¹

Valuing the latest information most. In the investment world, the latest news is almost always more valuable than old news... but when the latest news is consistently good (or consistently bad), memories of previous market climate(s) may become too distant. If we are not careful, our minds may subconsciously dismiss the eventual emergence of the next bear (or bull) market.

Being overconfident. The more experienced we are at investing, the more confidence we have about our investment choices. When the market is going up and a clear majority of our investment choices work out well, this reinforces our confidence, sometimes to a point where we may start to feel we can do little wrong thanks to the state of the market, our investing acumen or both. This can be dangerous.

The herd mentality. You know how this goes: if everyone is doing something, they must be doing it for sound and logical reasons. If most investors are getting out of equities, or getting back into equities, it follows that you should follow them. The herd mentality is what leads many investors to buy high (and sell low). It can also promote panic selling. Above all, it encourages market timing – and when investors try to time the market, they frequently realize subpar returns.

Did you know that American retail investors held equity shares for an average of 6.3 years during the 1950s? That duration kept shortening until the 2000s, when it was reduced to roughly six months – which is still the average today. We have exponentially greater media coverage of Wall Street today than we had in the 1950s, and that may be the big factor in that difference – but still, you have to wonder how much better the typical investor’s return would be if he or she had the patience of the investors of the past.²

Extreme aversion to risk. Some investors want zero risk, or close. What price do they pay in pursuit of that goal? The opportunity cost may be sizable. In building an extremely risk-averse portfolio, they thwart their potential for significant gains when the equity markets advance.

Everyone loves to be certain about things. Sometimes, however, we need to ask ourselves what that certainty is based on, and what it reflects about ourselves. Examining our preconceptions may help us as we invest.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600. This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - gallup.com/poll/184640/economic-confidence-index-stable.aspx [8/18/15]

2 - nytimes.com/2014/01/13/your-money/stocks-and-bonds/why-we-buy-in-a-marked-up-market.html [1/13/14]

Kim 9/20/15 Kim 9/20/15

The Fed Decides to Wait

In a tough time for equities, it elects not to roil the markets. On Thursday, the Federal Reserve postponed raising short-term interest rates. Citing “global economic and financial developments” that could “somewhat” impair economic progress and lessen inflation pressure, the Federal Open Market Committee voted 9-1 against a rate hike, with Richmond Fed President Jeffrey Lacker being the lone dissenter.¹

This spring, a September rate hike seemed probable – but during this past week, assumptions grew that the central bank would put off tightening. On Wednesday, the futures market put the likelihood of a rate hike at less than 30%.²

The latest economic indicators did not suggest the time was right. The August Consumer Price Index retreated 0.1%, and the core CPI ticked up only 0.1%. In annualized terms, core CPI was up 1.8% through August while the Federal Reserve’s own core Personal Consumption Expenditures (PCE) price index was only up 1.2%. Retail sales advanced a mere 0.2% in August, 0.1% minus auto sales. Industrial production slipped 0.4% last month. The healthy labor market aside, none of this data was particularly compelling.^3,4

Additionally, central banks have eased across the board the last few years. The Bank of Japan, the Reserve Bank of India, the People’s Bank of China, the Bank of Canada, the European Central Bank – none of them have begun tightening. Fed officials may have worried about the global impact had the FOMC elected to start a rate hike cycle.⁴

Some institutional investors hoped the Fed would tighten. Royal Bank of Scotland researcher Alberto Gallo recently surveyed 135 influential market participants and found that a majority wanted a September rate hike; 80% called for the Fed to make an upward move by the end of 2015. (Just 42% thought a September rate hike would occur, however.)²

That may seem like an odd viewpoint, but another response to the RBS survey helps to explain it: 63% of these institutional investors felt central banks had been too accommodative to equities markets, to the point where their credibility was slipping and exits from easy money policies appeared difficult.²

We may be witnessing a hawkish pause. The Fed uses a dot-plot chart to publish its forecast for the key interest rate, and the latest dot-plot projects the federal funds rate at 0.40% by the end of 2015. In other words, the Fed more or less told investors to get ready for a rate hike on either October 28 or December 16, the dates of its next two policy meetings.^1,5

At the press conference following Thursday’s FOMC policy statement, Fed chair Janet Yellen acknowledged that a rate hike could happen in October. (She noted that if it did, the Fed would arrange a press conference following that FOMC meeting.) Yellen said that the central bank wanted “a little more confidence” that annualized core inflation would approach its 2% target before adjusting rates. She also commented that the recent global equities selloff and the strengthening dollar do “represent some tightening of financial conditions.”⁶

On the whole, investors reacted positively to the news. In the wake of the announcement, the Dow Jones Industrial Average, Nasdaq Composite, and S&P 500 were all up more than 1%, with the S&P cresting the 2,000 mark and the Nasdaq approaching the 5,000 level. The CBOE VIX quickly dipped under 20.⁶

In one respect, it was a day of reassurance for investors – but it was also a day that brought signals that the Fed would soon start the process of normalizing monetary policy.

Citations.

1 - marketwatch.com/story/federal-reserve-keeps-interest-rates-unchanged-but-forecasts-hike-this-year-2015-09-17 [9/17/15]

2 - msn.com/en-us/money/markets/stocks-rise-as-fed-hike-odds-fade/ar-AAenA97?li=AA9ZWtY [9/16/15]

3 - briefing.com/investor/calendars/economic/2015/09/14-18 [9/17/15]

4 - forbes.com/sites/greatspeculations/2015/09/16/why-the-fed-will-not-hike-rates-this-year/ [9/16/15]

5 - dailyfx.com/calendar/bank-calendar.html [9/17/15]

6 - blogs.marketwatch.com/capitolreport/2015/09/17/live-blog-and-video-of-fed-decision-and-janet-yellen-press-conference-2/ [9/17/15]

Kim 9/1/15 Kim 9/1/15

The Long Ascent of the S&P 500

The index has overcome obstacle after obstacle through the years.

No one knows what will happen tomorrow on Wall Street. Even the most esteemed analysts can only make educated guesses. As the old saying goes: past performance is not indicative of future results.

All that said, the market has had many more positive years than negative years. The history of the S&P 500 is worth considering in light of recent market volatility. The S&P is the broad benchmark that economists, journalists, and investors regard as shorthand for the “market.” As the S&P 500 includes about 500 companies, it represents overall market performance better than the 30-component Dow Jones Industrial Average.

If you look at the annual returns of the S&P since 1928, you will see a long ascent with periodic interruptions, and a historical affirmation of equity investment. Looking at the total returns of the S&P (with dividends reinvested), the numbers are even more impressive.

The S&P advanced in 63 of the 87 years from 1928-2014. The average total return during those 63 profitable years was 21.5%. The average total return during the 24 down years was not as bad: -13.6%.¹

The index has endured only four multi-year slumps in this 87-year period: 1930-31, 1940-41, 1973-74 and 2000-02. As for extremes, the total return for 1954 was 52.56%; the total return for 1931 was -43.84%.²

Narrowing the time frame a bit to reflect the investing experience of baby boomers, the S&P advanced in 31 of the 40 years from 1975-2014.³

Have market gains typically outpaced inflation? Looking at data since 1950, the answer is yes. Only in the 1970s and 2000s did U.S. equities climb less than consumer prices. The nadir came in the 1970s, when yearly inflation averaged 7.4% while the S&P’s average price return was 1.6% and its average total return was 5.8%. Contrast that with the 1990s. In that decade, the annual price return for the index averaged 15.3%, the average total return 18.1%; mean yearly inflation was just 2.9%.⁴

When it seemed like the market was coming apart, the S&P recovered. As the oil crisis and inflation threatened to unglue venerable economies in the 1970s, the S&P posted total returns of -14.31% in 1973 and -25.90% in 1974. Then it roared back, gaining 37.00% in 1975 and 23.83% in 1976. When the dot-com bubble burst, the total return was -11.85% in 2001, -21.97% in 2002; after that, the S&P’s next two annual total returns were +28.36% and +10.74%. When the credit crunch and the Great Recession occurred, the index delivered an abysmal -36.55% total return in 2008; the next year, the total return improved to +25.94% and stayed positive through 2014.²

The S&P’s compound returns are especially encouraging. In studying the index’s compound annual returns, we get a solid understanding of how staying in the market has benefited the U.S. equity investor. Average returns are interesting, yet they do not factor in cumulative gains or losses over a given period.

Examining 40-year performance periods for the S&P from 1928-2014, the poorest such period had a compound return of 8.9%. The best 40-year “window” had a 12.5% compound return. Using an even narrower “window,” we find that the best 15-year stretch was from 1985-99, producing a compound return of 18.3%. The poorest 15-year stretch occurred before many of today’s investors were born: the interval from 1929-43 had a compound annual growth rate of just 0.6%.¹

The compound return across 1928-2014 is 9.8%, in simplest terms meaning that a $100 investment in shares of S&P 500 firms in that year would have grown to $346,261 in 2014.¹

The correction we have just witnessed looks momentary indeed in the light cast by these “windows” of time.

The lesson? Stay patient & keep the big picture in mind. Before this latest correction, the market had been comparatively calm for so long (the previous 10% drop happened nearly four years ago), investors had almost forgotten what a correction felt like. Moreover, that 2011 correction was the culmination of a three-month market descent; it was not so abrupt.⁵

We cannot predict tomorrow, but we can take comfort (and encouragement) from the history of the market and how well the S&P 500 has performed over time.

Citations.

1 - marketwatch.com/story/understanding-performance-the-sp-500-in-2015-02-18 [2/18/15]

2 - pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html [1/5/15]

3 - 1stock1.com/1stock1_141.htm [8/27/15]

4 - simplestockinvesting.com/SP500-historical-real-total-returns.htm [8/27/15]

5 - cnbc.com/2015/08/21/the-associated-press-qa-what-a-stock-market-correction-means-to-you.html [8/21/15]

Kim 8/24/15 Kim 8/24/15

What Does the Devalued Yuan Mean for the U.S.?

A look at China’s unexpected move & its potential impact.

China has surprised global investors by weakening the yuan almost 5%. Its central bank may even weaken it further.^1,5

Why did the PRC make this move? Its long-booming economy is in a slump. Most notably, Chinese exports have taken a major fall. In July, they were down 8.3% year-over-year. By depreciating the yuan, China is trying to help its exports maintain their competitive edge.²

Some of China’s other economic indicators have also disappointed lately. Chinese imports have retreated for nine straight months, slipping 6.1% for June and another 8.1% in July. The pace of retail sales in China slowed to a 15-year low in July. Producer prices in the PRC suffered their largest annualized slip since 2009 last month. Lastly, the nation’s economy may grow less than 7% this year – which would be the worst showing since the 1990s.^1,2

How may this impact America? The effects could be felt in several areas of our economy, and there could be some positives as well as negatives.

The Federal Reserve might decide to postpone a rate hike. Our central bank appears committed to raising interest rates before the year ends, perhaps as early as next month. A repeatedly devalued yuan might make the Fed think twice about that, however. China has effectively strengthened the dollar versus the yuan, making Chinese imports to America cheaper. That could lower consumer inflation pressure, and since annualized inflation in this country is already low, there would be less incentive for the Fed to raise rates. That would be bad news for savers but better news for some mortgage holders.³

Consumers could benefit more than businesses. As referenced above, a weakened yuan makes imported goods from China less expensive for Americans. Conversely, it also makes it that much harder for U.S. businesses to sell their products in the PRC, as Chinese consumers will have reduced purchasing power.³

You may see less hiring. A mightier greenback relative to the yuan means new hurdles for U.S. businesses in China, which could cut into earnings growth. While scores of American firms sell directly to Chinese consumers, others have strong ties to Chinese factories: look at Apple, which outsources the production of its iPads and iPhones to the PRC. A devalued yuan essentially whittles down the income U.S. businesses create in China and makes outsourced manufacturing costlier for American firms. You can draw a fairly direct line here: less income and lower earnings for American businesses could lead to slimmer payrolls. In particular, firms in the technology, energy and materials sectors could be impacted.^1,3

Oil & gas could become even cheaper. Oil is a dollar-denominated commodity, so a newly weakened yuan will test China’s demand for it. A stronger dollar relative to the yuan means that oil and oil-based products will be costlier in China. The Chinese might react by decreasing oil consumption. If China’s demand for oil lessens, that would help to keep oil prices low and American drivers would likely see lower gas prices as well.³

How about the markets? Equities seem to have regained their footing. When the PRC started devaluing the yuan on August 11, Wall Street read the move as a distress signal. The Dow opened with a triple-digit drop August 11 and lost 212 points for the day. On August 12, it took an even bigger fall at the open on news of the yuan weakening again, but it was down just 0.33 points at the close. The week’s subsequent trading days brought no further dives at the opening bell. Looking at the global picture, the DAX, CAC 40, Nikkei 225, and Shanghai Composite were all up 1% or more shortly after they opened Thursday.^4,5

As for the forex market, the yuan has certainly sunk versus other key currencies. By August 13, it had lost nearly 3% against the dollar over the past five trading days, and almost 5% against the euro.⁶

Is a global currency war about to heat up? The People’s Bank of China insists it does not seek to start one. A Barclays client report released August 13 noted the PBC “downplaying the need for a weaker yuan” at a press conference and refuting claims it wanted to devalue the currency at least 10% to support exports. Yi Gang, one of the PBoC’s deputy governors, stated that there was “no basis for a persistent weakening in the yuan... and that the aim of the PBoC is to have the market determine the exchange rate.”⁵

If the yuan does keep sliding and global markets slump significantly, the Federal Reserve and the European Central Bank could react supportively, providing investors with some reassurance. A weakened yuan presents another challenge to the Fed’s plans to tighten.

Citations.

1 - foxbusiness.com/markets/2015/08/12/us-stock-futures-slump-as-china-devalues-yuan-again/ [8/12/15]

2 - marketwatch.com/story/chinas-economy-enters-second-half-of-2015-on-weak-note-2015-08-09 [8/9/15]

3 - usatoday.com/story/money/business/2015/08/12/yuan-and-you-how-chinas-devalued-currency-affects-us-consumers/31524925/ [8/12/15]

4 - money.cnn.com/data/markets/dow/ [8/13/15]

5 - usatoday.com/story/money/markets/2015/08/13/market-calm/31610769/ [8/13/15}

6 - money.cnn.com/data/currencies/ [8/13/15]

Kim 8/10/15 Kim 8/10/15

Teaching Your Heirs to Value Your Wealth

Values can help determine goals & a clear purpose. Some millionaires are reluctant to talk to their kids about family wealth. Perhaps they are afraid what their heirs may do with it.

In a 2015 CNBC Millionaire Survey, 44% of families having at least $1 million in investable assets said that they had not yet told their children about their future inheritance. Another 27% said they had refrained from mentioning it until their children were 30 or older.¹

It can be awkward to talk about such matters, but these parents likely postponed discussing this topic for another reason: they wanted their kids to grow up with a strong work ethic instead of a “wealth ethic.”

If a child comes from money and grows up knowing he or she can expect a sizable inheritance, that child may look at family wealth like water from a free-flowing spigot with no drought in sight. It may be relied upon if nothing works out; it may be tapped to further whims born of boredom. The perception that family wealth is a fallback rather than a responsibility can contribute to the erosion of family assets. Factor in a parental reluctance to say “no” often enough, throw in an addiction or a penchant for racking up debt, and the stage is set for wealth to dissipate.

How might a family plan to prevent this? It starts with values. From those values, goals, and purpose may be defined.

Create a family mission statement. To truly share in the commitment to sustaining family wealth, you and your heirs can create a family mission statement, preferably with the input or guidance of a financial services professional or estate planning attorney. Introducing the idea of a mission statement to the next generation may seem pretentious, but it is actually a good way to encourage heirs to think about the value of the wealth their family has amassed, and their role in its destiny.

This mission statement can be as brief or as extensive as you wish. It should articulate certain shared viewpoints. What values matter most to your family? What is the purpose of your family’s wealth? How do you and your heirs envision the next decade or the next generation of the family business? What would you and your heirs like to accomplish, either together or individually? How do you want to be remembered? These questions (and others) may seem philosophical rather than financial, but they can actually drive the decisions made to sustain and enhance family wealth.

Feel no shame in exerting some control. A significant percentage of families seek to define a purpose for transferred wealth. In CNBC’s survey, 32% of parents aged 55 or younger said they were going to specify what their heirs could use their inheritances for, and that was also true for 15% of parents aged 55-69 and 9% of parents aged 70 or older.¹

You may want to distribute inherited wealth in phases. A trust provides a great mechanism to do so; a certain percentage of trust principal can be conveyed at age X and then the rest of it Y years later, as carefully stated in the trust language.

This is a way to avoid a classic mistake: giving your heirs too much money at once. In fact, a 2015 Merrill Lynch Private Banking & Investment Group report notes that 46% of high net worth parents share that very concern.²

Just how much is too much? Answers vary per family, of course. In the aforementioned Merrill Lynch survey, 46% of families said that they wanted to avoid handing down the kind of money that would dissuade their heirs from realizing their full potential in their lives and careers.²

By involving your kids in the discussion of where the family wealth will go when you are gone, you encourage their intellectual and emotional investment in its future. Pair values, defined goals, and clear purpose with financial literacy and input from a financial or legal professional, and you will take a confident step toward making family wealth last longer.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - cnbc.com/2015/07/22/wealthy-parents-fret-over-inheritance-talk-with-kids.html [7/22/15]

2 - bankrate.com/finance/estate-planning/critical-questions-before-leaving-an-inheritance-1.aspx [8/6/15]

Kim 7/14/15 Kim 7/14/15

China’s Chaotic Market

As the world watches, the nation’s government tries to end the downturn.

Investors worldwide worry about the state of China’s equity market. You could argue that these fears have impacted Wall Street as much as the crisis in Greece.

The recent ups and downs of the Shanghai Composite (SSE) have been startling: the 16 trading sessions from June 17-July 9 included daily losses of 6.42%, 7.40%, 5.77%, and 5.90% and daily gains of 2.48%, 5.53%, 2.41%, and 5.76%. To put that in perspective, imagine the S&P 500 gaining or losing 50-130 points a day or the Dow falling or rising 500-1,200 points per session.¹

The SSE is now in a bear market – it sank 24% between June 12 and July 4. Before that, it was up a dizzying 149% YTD.²

Is the summer slump in the SSE a measure of lost confidence in China’s economy? If so, will Chinese demand for oil, coal, and other imports weaken even more? The volume of imported goods to China fell 7% from Q1 2014 to Q1 2015.³

China’s government has taken some extraordinary steps to appease investors. Its actions make the Federal Reserve’s 2008 rescue effort look conservative.

Back then, the Fed bought mortgages and securities. The People’s Bank of China is putting its money into equities. It just created a 120-billion yuan ($19.3 billion) market-stabilization fund that the nation’s leading brokerages will use to invest in the largest SSE-listed companies.^5,6

On July 8, the China Securities Regulatory Commission barred anyone owning more than 5% of a company from selling their shares for six months. Days earlier, Chinese officials suspended all IPOs, anxious about potential cash outflows from existing SSE-listed firms.^4,5

The China Banking Regulatory Commission is now letting lenders roll over loans backed by shares – and it has publicly stated its support for banks extending credit to exchange-listed firms doing buybacks. Meanwhile, the CSRC is embarking on an effort to crack down on “malicious” short selling.^2,4

Essentially, Chinese are being told that there is no downside to investing in equities – at least for the moment. (The Chinese government has even urged people to buy shares out of patriotic duty.)²

One major problem has emerged after all this: a shortage of liquidity. Only about half of Chinese firms are trading at the moment.^2,4

To some observers, these measures look like overkill given that equities amount to less than 15% of the net worth of Chinese households. (Real estate has long been the favorite investment of the nation’s rising middle class.) To economists and Wall Street analysts, these efforts are welcome correctives needed to soothe global investors as well as Chinese investors.⁶

The profile of the Chinese investor is changing, and it is changing in a way that might unnerve investors elsewhere. Less than 7% of Chinese own equities (90 million out of 1.36 billion people), but more are entering the market; in May alone, 12 million new retail accounts opened on Chinese exchanges as the SSE surged north. Who are these new investors? Some are college students. The Atlantic reports that 31% of Chinese university students now own equities, about three-quarters of them investing with mom and dad’s money in the process. Others lack higher education – of the Chinese households that opened investment accounts in Q1, only about a third were even headed by high school graduates.^2,7

Investors have yet to bail out. Even with its economy slowing and its market rollercoastering, the opportunity China presents is just too great to ignore. Lipper reports that retail investors have directed $3.4 billion into China-focused investment vehicles YTD, representing the largest first-half investment since 2009. While that inflow might weaken or reverse itself in the wake of China’s biggest selloff since 2008, international diversification has its merits – and institutional investors may see a buying opportunity. As fund manager Yu Zhang told Reuters, “We're not sure how long this volatile period will last, but to me the medium- to long-term outlook for China is still trending up.”⁸

Citations.

1 - investing.com/indices/shanghai-composite-historical-data [7/9/15]

2 - theatlantic.com/international/archive/2015/07/chinas-nervewracking-stock-market-collapse/397724/ [7/4/15]

3 - tinyurl.com/ntrfw3w [5/25/15]

4 - forbes.com/sites/gordonchang/2015/07/09/china-making-stock-declines-illegal/ [7/9/15]

5 - businessinsider.com/china-suspends-ipos-2015-7 [7/4/15]

6 - tinyurl.com/psnwgpc [7/7/15]

7 - data.worldbank.org/indicator/SP.POP.TOTL [7/9/15]

8 - tinyurl.com/nvmus8j [7/9/15]

Kim 6/29/15 Kim 6/29/15

WILL THINGS IMPROVE FOR MEDICARE AND SOCIAL SECURITY?

The healthcare reforms may lead to some short-term aid. Could Medicare soon be in better shape? Maybe. At the start of August, Medicare’s trustees reported to Congress that Medicare should remain financially in the black through 2029, a 12-year improvement over last year’s estimate.¹ They credited the healthcare reforms carried out by Congress and the Obama administration, citing greater efficiency that would translate to savings for the program.

However, there is no guarantee that Medicare will get to retain those federal savings, and no certainty that the savings projected by eliminating subsidies paid to private insurers will result.

Additionally, as Concord Coalition executive director Robert Bixby told the Los Angeles Times, “You can’t spend the same money twice.”² It would seem unwise to use Medicare savings to expand Medicare coverage.

The Medicare trustees claimed that with the projected $192 billion in cuts to Medicare Advantage plans, home health care and hospitals across the next ten years, both the 75-year shortfall for its hospital fund and projected costs of the Medicare Supplementary Insurance program will shrink. More alterations will be needed to keep Medicare running in decades to come, the August report notes.^1,3

Social Security’s fortunes could be enhanced in 2019. Why 2019? In that year, a new tax is scheduled to kick in for so-called “Cadillac plans” – health insurance packages with annual premiums of $8,000 or more for individuals or $21,000 or more for families. In 2019, insurers offering these plans will have to pay a 40% federal tax for every dollar spent over the $8,000 or $21,000 cutoff.^1,4

That tax is projected to give Social Security a bit of relief. In 2010, Social Security is paying out more than it is taking in – and by previous federal estimates, that wasn’t supposed to happen until 2016. According to government forecasts, it can continue using payroll taxes and interest income to cover benefits until 2024.¹

The projection that Social Security’s accumulated surplus will run dry in 2037 is unchanged. After 2037 (assuming things don’t change), Social Security’s program revenues would only cover about 75% of its expenses – so payroll taxes would have to increase, or benefits would have to be scaled down.¹

Until both programs receive true long-term fixes, we will all have to make do with these short-term encouragements.

Kim Bolker is a representative with Sigma Financial and may be reached at kbolker@sigmarep.com or 616-942-8600. This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting Representative or the Representative’s Broker/Dealer. This information should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.. www.petermontoya.com, www.montoyaregistry.com, www.marketinglibrary.net

Citations

1 - nytimes.com/2010/08/06/health/policy/06medicare.html [8/5/10]

2 - latimes.com/news/nationworld/nation/wire/sc-dc-0806-social-security-20100805,0,6306255.story [8/5/10]

3 - csmonitor.com/USA/Politics/2010/0322/Health-care-reform-bill-101-What-does-it-mean-for-seniors [3/22/10]

4 - slate.com/id/2232434 [10/14/09]

Kim 5/18/15 Kim 5/18/15

The Big Economic Mystery of 2015

If the economy is healthy, why are retail sales so poor?

Retail sales have been flat or negative for four out of the past five months. Even though households are saving an average of $50 a month on gasoline compared to a year ago, that savings has not inspired consumers to increase their spending.¹

Commerce Department data released last week showed no retail sales growth in April; even core retail sales (which exclude car and gasoline purchases) rose only 0.2%. Retail purchases fell 0.2% in Q1, representing the first quarterly dip since 2012. Through April, they were up just 0.9% annually.^2,3

What is holding the consumer back? If economists could pinpoint this on a single factor, there would be no mystery here. Significant clues have emerged, however.

Are people just saving more? Apparently they are. The personal savings rate declined 0.4% in March to 5.3%, yet it was at 5.3% or greater throughout the first quarter. In the previous three quarters, it never reached that percentage.⁴

Studies from the Federal Reserve and Visa also affirm a trend toward thriftiness. According to Fed research, Q1 saw the biggest decrease in consumer credit card use in any quarter in the past four years. Half the consumers contacted in a recent Visa poll indicated they would keep the money they saved thanks to cheaper gas prices; just 25% said they would spend it.²

Is cheap gasoline a factor? Certainly, because as gas prices drop fewer dollars are spent on fuel and automotive costs. That makes the headline retail sales number weaker. The weakness was already present, though: minus gasoline purchases, retail sales are up 3.6% in the past 12 months. That compares to 5.7% average annualized growth since 1990.²

How about the blizzards & port strikes that happened this winter? Analysts have frequently cited those two developments – but headline retail sales rose 1.1% in March even with their presence, and were flat for April as weather and labor conditions improved.²

Are households devoting more money to paying off good debts? Quite possibly, and this may also have influenced the retail sales retreat. As MarketWatch notes, student loan debt is now the fastest-growing debt in America. Households have also spent more on healthcare in recent years, implying greater out-of-pocket medical costs. (Healthcare spending has not flagged like discretionary spending, which is a big reason why headline consumer spending looks somewhat better than headline retail sales.) In the Visa poll mentioned above, 25% of the respondents said they would use their savings at the pump to address existing debts.²

What types of stores are suffering the most from the decline? Retail purchases at electronics stores retreated for a seventh consecutive month in April. Spending at department stores fell in April by 2.2%, the largest monthly amount in more than a year; furniture and auto sales also declined. The silver lining: sales rose 0.8% in April at online businesses, 0.7% at restaurants and 0.3% at home improvement stores.^2,3

How long might this continue? Some analysts are optimistic that this slump will end this quarter. They point to decent year-over-year wage growth (2.2%), the April rebound in hiring, and warmer weather as positives. Other analysts feel that the economy is less healthy than it appears; they sense that the Fed will refrain from raising interest rates until 2016 in light of subpar retail sales and other factors.³

One thing is for certain: Wall Street will review the May and June retail sales reports with great interest. If discretionary consumer spending continues to lag, it will signal a loss of momentum in the growth of the economy.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - blogs.wsj.com/moneybeat/2015/05/13/markets-react-to-weak-retail-sales-report/ [5/13/15]

2 - marketwatch.com/story/retail-sales-flat-in-april-as-gas-savings-continue-to-be-pocketed-2015-05-13 [5/13/15]

3 - bloomberg.com/news/articles/2015-05-13/retail-sales-little-changed-as-americans-reluctant-to-splurge [5/13/15]

4 - tradingeconomics.com/united-states/personal-savings [5/14/15]

Kim 3/17/15 Kim 3/17/15

The Strong Dollar: Good or Bad?

What is dollar strength & who invests in it?

You may have heard that the dollar is “strong” right now. You may have also heard that a strong dollar amounts to a headwind against commodities and stocks.

While there is some truth to that, there is more to the story. A strong dollar does not necessarily rein in the bulls, and dollar strength can work for the economy and the markets.

The U.S. Dollar Index has soared lately. Across July 2014-February 2015, the USDX (which measures the value of the greenback against key foreign currencies) rose an eyebrow-raising 19.44%.¹

On March 9, the European Central Bank initiated its quantitative easing program. The dollar hit a 12-year high against the euro a day later, with the USDX jumping north more than 3% in five trading days ending March 10. Remarkable, yes, but the USDX has the potential to climb even higher.^2,3

Before this dollar bull market, we had a weak dollar for some time. A dollar bear market occurred from 2001-11, partly resulting from the monetary policy that the Federal Reserve adopted in the Alan Greenspan and Ben Bernanke years. As U.S. interest rates descended to historic lows in the late 2000s, the dollar became more attractive as a funding currency and demand for dollar-denominated debt increased.⁴

In Q1 2015, private sector dollar-denominated debt hit $9 trillion globally. Asian corporations have relied notably on foreign currency borrowing, though their domestic currency borrowing is also significant; Morgan Stanley recently researched 625 of these firms and found that dollar-denominated debt amounted to 28% of their total debt.^4,5

So why has the dollar strengthened? The quick, easy explanation is twofold. One, the Fed is poised to tighten while other central banks have eased, promoting expectations of a mightier U.S. currency. Two, our economy is healthy versus those of many other nations. The greenback gained on every other major currency in 2014 – a development unseen since the 1980s.⁴

This explanation for dollar strength aside, attention must also be paid to two other critical factors emerging which could stoke the dollar bull market to even greater degree.

At some point, liabilities will increase for the issuers of all that dollar-denominated debt. That will ramp up demand for dollars, because they will want to hedge.

Will the dollar supply meet the demand? The account deficit has been slimming for the U.S., and the slimmer it gets, the fewer new dollars become available. It could take a few years to unwind $9 trillion of dollar-denominated debt, and when you factor in a probable rate hike from our central bank, things get really interesting. The dollar bull may be just getting started.

If the dollar keeps rallying, what happens to stocks & commodities? Earnings could be hurt, meaning bad news for Wall Street. A strong dollar can curb profits for multinational corporations and lower demand for U.S. exports, as it makes them more expensive. U.S. firms with the bulk of their business centered in America tend to cope better with a strong dollar than firms that are major exporters. Fixed-income investments invested in dollar-denominated assets (as is usually the case) may fare better in such an environment than those invested in other currencies. As dollar strength reduces the lure of gold, oil and other commodities mainly traded in dollars, they face a real headwind. So do the economies of countries that are big commodities producers, such as Brazil and South Africa.⁶

The economic upside is that U.S. households gain more purchasing power when the dollar strengthens, with prices of imported goods falling. Improved consumer spending could also give the Fed grounds to extend its accommodative monetary policy.⁶

How are people investing in the dollar? U.S. investors have dollar exposure now as an effect of being invested in the U.S. equities market. Those who want more exposure to the rally can turn to investment vehicles specifically oriented toward dollar investing. European investors are responding to the stronger greenback (and the strong probability of the Fed raising interest rates in the near future) by snapping up Treasuries and corporate bonds with longer maturities.

Stocks can still rally when the dollar is strong. As research from Charles Schwab indicates, the average annualized return for U.S. stocks when the dollar rises has been 12.8% since 1970. For bonds, it has been 8.5% in the years since 1976. A dollar rally amounts to a thumbs-up global vote for the U.S. economy, and that can certainly encourage and sustain a bull market.⁷

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [3/9/15]

2 - reuters.com/article/2015/03/10/us-markets-stocks-idUSKBN0M612A20150310 [3/10/15]

3 - forbes.com/sites/maggiemcgrath/2015/03/10/u-s-equities-hammered-on-dollar-strength-and-oil-weakness/ [3/10/15]

4 - valuewalk.com/2015/02/us-dollar-bull-market/ [2/4/15]

5 - tinyurl.com/ptpolga [2/25/15]

6 - blogs.wsj.com/briefly/2014/12/24/how-a-strong-dollar-affects-investors-at-a-glance/ [12/24/14]

7 - time.com/money/3541584/dollar-rally-global-currencies/ [2/13/15]

Kim 8/19/14 Kim 8/19/14

After QE3 Ends

Can stocks keep their momentum once the Federal Reserve quits easing? “Easing without end” will finally end. According to its June policy meeting minutes, the Federal Reserve plans to wrap up QE3 this fall. Barring economic turbulence, the central bank’s ongoing stimulus effort will conclude on schedule, with a last $15 billion cut to zero being authorized at the October 28-29 Federal Open Market Committee meeting.^1,2

So when might the Fed start tightening? As the Fed has pledged to keep short-term interest rates near zero for a “considerable time” after QE3 ends, it might be well into 2015 before that occurs.¹

In June, 12 of 16 Federal Reserve policymakers thought the benchmark interest rate would be at 1.5% or lower by the end of 2015, and a majority of FOMC members saw it at 2.5% or less at the end of 2016.³

It may not climb that much in the near term. Reuters recently indicated that most economists felt the central bank would raise the key interest rate to 0.50% during the second half of 2015. In late June, 78% of traders surveyed by Bloomberg News saw the first rate hike in several years coming by September of next year.^4,5

Are the markets ready to stand on their own? Quantitative easing has powered this bull market, and stocks haven’t been the sole beneficiary. Today, almost all asset classes are trading at prices that are historically high relative to fundamentals.

Some research from Capital Economics is worth mentioning: since 1970, stocks have gained an average of more than 11% in 21-month windows in which the Fed greenlighted successive rate hikes. Bears could argue that “this time is different” and that stocks can’t possibly push higher in the absence of easing – but then again, this bull market has shattered many expectations.⁶

What if we get a “new neutral”? In 2009, legendary bond manager Bill Gross forecast a “new normal” for the economy: a long limp back from the Great Recession marked by years of slow growth. While Gross has been staggeringly wrong about some major market calls of late, his take on the post-recession economy wasn’t too far off. From 2010-13, annualized U.S. GDP averaged 2.3%, pretty poor versus the 3.7% it averaged from the 1950s through the 1990s.³

Gross now sees a “new neutral” coming: short-term interest rates of 2% or less through 2020. Some other prominent economists and Wall Street professionals hold roughly the same view, and are reminding the public that the current interest rate environment is closer to historical norms than many perceive. As Prudential investment strategist Robert Tipp told the Los Angeles Times recently, "People who are looking for higher inflation and higher interest rates are fighting the last war." Lawrence Summers, the former White House economic advisor, believes that the U.S. economy could even fall prey to “secular stagnation” and become a replica of Japan’s economy in the 1990s.³

If short-term rates do reach 2.5% by the end of 2016 as some Fed officials think, that would hardly approach where they were prior to the recession. In September 2007, the benchmark interest rate was at 5.25%.³

What will the Fed do with all that housing debt? The central bank now holds more than $1.6 trillion worth of mortgage-linked securities. In 2011, Ben Bernanke announced a strategy to simply let them mature so that the Fed’s bond portfolio could be slowly reduced, with some of the mortgage-linked securities also being sold. Two years later, the strategy was modified as a majority of Fed policymakers grew reluctant to sell those securities. In May, New York Fed president William Dudley called for continued reinvestment of the maturing debt even if interest rates rise.⁷

Bloomberg News recently polled more than 50 economists on this topic: 49% thought the Fed would stop reinvesting debt in 2015, 28% said 2016, and 25% saw the reinvestment going on for several years. As for the Treasuries the Fed has bought, 69% of the economists surveyed thought they would never be sold; 24% believed the Fed might start selling them in 2016.⁷

Monetary policy must normalize at some point. The jobless rate was at 6.1% in June, 0.3% away from estimates of full employment. The Consumer Price Index shows annualized inflation at 2.1% in its latest reading. These numbers are roughly in line with the Fed’s targets and signal an economy ready to stand on its own. Hopefully, the stock market will be able to continue its advance even as things tighten.⁶

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com

1 - marketwatch.com/story/fed-plans-to-end-bond-purchases-in-october-2014-07-09 [7/9/14]

2 - telegraph.co.uk/finance/economics/10957878/US-Federal-Reserve-on-course-to-end-QE3-in-October.html [7/9/14]

3 - latimes.com/business/la-fi-interest-rates-20140706-story.html#page=1 [7/6/14]

4 - reuters.com/article/2014/06/17/us-economy-poll-usa-idUSKBN0ES1RD20140617 [6/17/14]

5 - bloomberg.com/news/2014-07-07/treasuries-fall-after-goldman-sachs-brings-forward-fed-forecast.html [7/7/14]

6 - cbsnews.com/news/will-the-fed-rate-hikes-rattle-the-market/ [7/10/14]

7 - bloomberg.com/news/2014-06-17/fed-will-raise-rates-faster-than-investors-expect-survey-shows.html [6/17/14]

Kim 5/5/14 Kim 5/5/14

The Rise of Bitcoin

Is the virtual currency a fad, or the future? Mention “bitcoin” to assorted economists or investors, and you may trigger all kinds of associations. To some, it signifies an exciting new reality – a digital currency, with a payment system that could revolutionize finance. To others, it is a volatile commodity – propped up by hype, fraught with risk. It also refers to an open source software system, and a financially startling concept – currency production through the Internet.

You can’t talk about Bitcoin without talking about bitcoin. Bitcoin with a capital B references the Bitcoin network that creates the digital currency; bitcoin with a lower-case b refers to the currency itself.

Where is bitcoin made? Online. All bitcoin is generated in cyberspace, and the process is interesting to say the least. The first step in making bitcoin is “mining”, and mining takes math skills. A bitcoin “miner” (a computer user) tries to solve one or more math problems, with success resulting in shares of bitcoin. The more miners there are, however, the smaller fractional bitcoin shares become as no more than 21 million bitcoins will ever be created.¹

Once mined, a bitcoin can be sent to a miner’s password-protected digital wallet. (If the digital wallet is hacked, the bitcoin is irrevocably lost.) A miner can use bitcoin to pay for goods and services at a small-but-growing network of online and brick-and-mortar merchants.¹

What is a bitcoin worth? Ask the free market – specifically, the commodities market. Look at the bitcoin charts at Coinbase.com, one of a few sites tracking historical daily settlement prices for bitcoin across various bitcoin exchanges. On July 6, 2013, a single bitcoin was worth $69.31; on November 30, 2013, a bitcoin was worth $1,126.82; on April 16, 2014, a lone bitcoin was worth $516.61.²

Volatility and bitcoin go hand in hand. Since no central bank in the world issues bitcoin, it is only worth what investors are willing to pay for it. In the worst-case scenario, bitcoin plays out like the tulip bulb mania of the 1600s and investors eventually pay little or nothing for it. In the blue-sky scenario, bitcoin becomes a part of everyday life.

University of Virginia economist Peter Rodriguez neatly summed up the emergence of bitcoin in the Wall Street Journal: “It’s as if there was an effort to create gold that wasn’t gold. The longer [bitcoins] persist, the more that people will have faith in them as a legitimate store of value.”¹

Who dreamed up bitcoin? A mysterious person or entity going by the name of Satoshi Nakamoto. A white paper under that authorship floated the idea of a virtual currency and a network to create it in 2008. In 2009, “Satoshi Nakamoto” created the open source software system to generate bitcoin.³

In March, Newsweek claimed it had found Nakamoto hiding in plain sight, living quietly in a middle-class Southern California suburb – but the man they profiled, Dorian Satoshi Nakamoto, told the Associated Press that he had never heard of bitcoin until February 2014. Students and researchers at Great Britain’s Aston University claim that the author of the 2008 white paper is Nick Szabo, a respected academic theorist and George Washington University law school graduate who invented Bit Gold, a conceptual forerunner of the Bitcoin network.^4,5

For bitcoin to steal gold’s shine, it has to lose its dark side. If all of this sounds like something out of a dystopian science fiction novel, you aren’t alone in your skepticism. There is much that is exciting about bitcoin and its potential to streamline global finance, but there are also big question marks. As Entrepreneur notes, about 90% of bitcoin buyers are speculators. That is not the only detail about bitcoin that unnerves investors. The digitized anonymity of bitcoin transactions beckons to cybercriminals, who undoubtedly see bitcoin exchanges as upcoming grand prizes when it comes to hacking, phishing and malware.⁶

Where bitcoin has really taken off is China – in fact, that is where about half of daily global bitcoin trading occurred in 2013. But when the People’s Bank of China stated that bitcoin was dangerous, bitcoin values on the Mt. Gox exchange fell from $1,300 to $700 in 24 hours. (That exchange later filed for bankruptcy.) The PBOC maintains that it will not ban bitcoin.^4,6,7

Bitcoin prices skyrocketed in 2013, and they could fall just as dramatically through a variety of factors (hackers raiding exchanges, crackdowns in the PRC, imitators rising to steal its thunder). At this point, it is little wonder that many regard bitcoin as a speculative play for the long run.

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com

1 - tinyurl.com/nl9n7hw [11/23/13]

2 - coinbase.com/charts [4/16/14]

3 - tinyurl.com/nvlxph7 [1/15/14]

4 - tinyurl.com/psjsfre [3/18/14]

5 - entrepreneur.com/article/233143 [4/16/14]

6 - entrepreneur.com/article/230354 [12/16/13]

7 - blogs.wsj.com/moneybeat/2014/04/11/bitbeat-bitcoin-surges-as-pboc-softens-up-its-tone/ [4/11/14]

Kim 3/17/14 Kim 3/17/14

China, Ukraine & the Markets

New economic & political concerns are putting stocks to the test.

Dow drops again, analysts wonder. March 13 saw another triple-digit descent for the blue chips – the Dow Jones Industrial Average plummeted more than 230 points, the second market day in less than two weeks to witness a loss of 150 points or greater. The S&P 500’s (small) YTD gain was also wiped out by the selloff. As the bull market enters its sixth year, it faces some sudden and potentially stiff headwinds, hopefully short-term.^1,2

In Ukraine, the situation is fluid. As the trading week ended, much was unresolved about the nation’s future. The parliament of its autonomous Crimea region had announced a March 16 referendum, which gave voters two options: rejoin Russia, or break away from Ukraine and form a new nation.³

Ukraine’s government calls the referendum unconstitutional. The United States and key EU members agree and claim it violates international law. Russia welcomes the vote – 60% of the Crimean Peninsula’s population is made up of ethnic Russians, and Russian troops more or less control the region now.³

Russia wants the real estate (its Black Sea naval fleet is based on the Crimean Peninsula) and could spread its economic influence further with the annexation of that region. The cost: economic sanctions, probably harsh ones. Should diplomacy fail to stop the secession vote, then Russia can expect “a very serious series of steps Monday in Europe and [the United States],” according to Secretary of State John Kerry.³

So far, the moves have been largely symbolic: a suspension of the 2014 G8 summit and the talks on Russia’s entry into the OECD, and asset freezes for individuals and companies deemed to be hurting democracy in Ukraine. Additional “serious” steps could include financial sanctions for Russian banks, an embargo on arms exports to Russia, and the EU opting to get more of its energy supplies from other nations. Russia could respond in kind, of course, with similar asset freezes and possible pressure on eurozone companies doing business in Ukraine. The fact that Russia has already staged war games near Ukraine adds another layer of anxiety for global markets.⁴

Investors see China’s growth clearly slowing. Its exports were down 18.1% year-over-year in February. Analysts polled by Reuters projected China’s industrial output rising 9.5% across January and February, but the gain was actually just 8.6%. The Reuters consensus for a yearly retail sales gain of 13.5% for China was also way off; the advance measured in February was 11.8%. These disappointments bothered Wall Street greatly on Thursday. The news also roiled the metals market – copper fell 1.3% on March 13, its third down day on the week. Besides being the world’s top copper user, China also employs the base metal as collateral for bank loans.^1,5,6

As Chinese Premier Li Keqiang noted on March 13, the nation’s 2014 growth target is 7.5%; the respected (and very bearish) economist Marc Faber told CNBC he suspects China’s growth is more like 4%. The upside, Faber commented, is that “4 percent growth in a world that has no growth is actually very good.”⁶

Will the bull market pass the test? It has passed many so far, and it is just several days away from becoming the fifth-longest bull in history (outlasting the 1982-7 advance). Bears wonder how long it can keep going, referencing a P-E ratio of 17 for the S&P 500 right now (rivaling where it was in 2008 before the downturn), and the 1.9% consensus estimate of U.S. Q1 earnings growth in Bloomberg’s latest survey of Wall Street analysts (down from a 6.6% forecast when 2014 began).¹

Then again, the weather is getting warmer and the new data stateside is encouraging: February saw the first rise in U.S. retail sales in three months, and jobless claims touched a 4-month low last week. Maybe Wall Street (and the world) can keep these signs of the U.S. economic rebound in mind as stocks deal with momentary headwinds.¹

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - bloomberg.com/news/2014-03-12/nikkei-futures-fall-before-china-data-while-oil-rebounds.html [3/12/14]

2 - ajc.com/feed/business/stock-market-today-dow-jones-industrial-average/fYjPS/ [3/3/14]

3 - cnn.com/2014/03/13/politics/crimea-referendum-explainer/ [3/13/14]

4 - uk.reuters.com/article/2014/03/13/uk-ukraine-crisis-factbox-idUKBREA2C19L20140313 [3/13/14]

5 - cnbc.com/id/101492226 [3/13/14]

6 - cnbc.com/id/101489500 [3/13/14]

The Rise of the Fee-Based Financial Professional

Why the Brexit Should Not Rattle Investors

The Brexit Shakes Global Markets

Do Women Face Greater Retirement Challenges Than Men?

Sometimes the Pundits Get It Wrong

The Things Most Likely to Kill Us

Money Concerns for Those Remarrying

When Will Stocks Stabilize?

Do Our Biases Affect Our Financial Choices?

The Fed Decides to Wait

The Long Ascent of the S&P 500

What Does the Devalued Yuan Mean for the U.S.?

Teaching Your Heirs to Value Your Wealth

China’s Chaotic Market

WILL THINGS IMPROVE FOR MEDICARE AND SOCIAL SECURITY?

The Big Economic Mystery of 2015

The Strong Dollar: Good or Bad?

After QE3 Ends

The Rise of Bitcoin

China, Ukraine & the Markets

Contact

Securities and Advisory Services