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Investing

Certified Investment Management Analyst® (CIMA®)

It has been 10 years since I earned my CFP® (Certified Financial Planner™) credential. Since then I have completed a number of education/credential programs to continue my life long pursuit for knowledge, to be an accomplished and trusted advisor whose education and training exceeds that of the average advisor. I decided it was time to work towards an advanced investments certification, something that would really challenge me, and so I decided to embark on a journey to earn the Certified Investment Management Analyst® (CIMA®) program offered through the Investment Management Consultants Association® (IMCA).

From IMCA: "CIMA professionals integrate a complex body of investment knowledge, ethically contributing to prudent investment decisions by providing objective advice and guidance to individual investors and institutional investors. The CIMA certification program is the only credential designed specifically for financial professionals who want to attain a level of competency as an advanced investment consultant."

CIMA Certification is a rigorous multi-step process that typically takes about 9 months to complete. Once you submit the application and pass a background check you are eligible to take the 2-hour, 50 question multiple-choice Qualification Exam (QE) proctored at an AMP testing center, which typically takes approximately 100 hours of study time. The pass rate for the most recent quarter of first-time takers of the QE was 54% and 61% over the past two years; for re-testers it is only 44%. For the Core Topics list see below.

One you have passed the Qualification exam, then you are eligible to enroll in the education component; a graduate-level executive education course (packed into one grueling week) taught at The University of Pennsylvania's Wharton School of Business Executive Education Program. Successful completion of the course requires passing a 4-hour 25-question essay exam at the end of the program. From there you are then eligible to take the final Certification Exam which is a 4-hour 100 question multiple-choice exam held at the testing center during 4 testing windows each year. The pass rate in the most recent quarter for first-time takers of the CE was 69% and 63% over the past two years; for re-testers it is only 48%. There is no doubt this is a challenging program; According to IMCA, only 1 in 3 who start the program successfully finish!

I began seriously studying in April and passed the Qualification Exam on my first try on June 9th. Since then I've been preparing for Wharton which starts Monday 10/3/2016. If all goes well then I expect to take the final Certification Exam sometime in November. No doubt the next two months will be challenging so I appreciate your understanding and support. I look forward to sharing will all of my client the many things I have and expect to learn through the completion of this program.

CIMA Core Topics

  • Governance
    • IMCA Code of Professional Responsibility and Standards of Practice
    • Regulatory Considerations
  • Fundamentals
    • Statistics and Methods
    • Applied Finance and Economics
    • Global Capital Markets History and Valuation
  • Portfolio Performance and Risk Measurements
    • Attributes of Risk
    • Risk Measurements
    • Performance Measurement and Attribution
  • Traditional and Alternative Investments
    • Traditional Global Investments (Equity and Fixed Income)
    • Fixed-Income Vehicles
    • Foreign Exchange Market
    • Alternative Investment
    • Options, Futures, and Other Derivatives
    • Tools and Strategies Based on Technical Analysis
  • Portfolio Theory and Behavioral Finance
    • Portfolio Theories and Models
    • Behavioral Finance Theory
  • Investment Consulting Process
    • Client Discovery
    • Investment Policy Statement (IPS)
    • Portfolio Risk Management Strategies
    • Manager Search, Selection, and Monitoring
    • Perform Portfolio Review and Revisions Process

For detailed information on the CIMA certification process, go to https://www.imca.org/cima

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IRAs 401ks or both?

I  just answered a  question on www.Nerdwallet.com  which was "You can have a Traditional IRA and a Roth IRA; but can you also have a 401k and a Roth 401k, all 4 at the same time?" and thought I'd put this on my blog since it is a common question. Here is my answer:

Yes, you most certainly can have a Traditional IRA, a Roth IRA, a 401k, and a Roth 401k all at the same time. The issue will be which you can contribute to and how much.

For example, the annual contribution limit for IRAs is $5,500 plus $1,000 catch up (CU) if over 50. Let’s assume you are under 50 for my explanation. You can contribute any combination of amounts between a Traditional IRA and a Roth IRA as long as the total does not go over the limit, $5,500. So you could put $3,000 in your Traditional IRA and $3,500 in your Roth, or $1,000 in your Traditional IRA and $4,500 in your Roth.

Anyone can contribute to an IRA regardless of income but your ability to deduct it would be limited if your Adjusted Gross Income (AGI) is over $98,000-$118,000 if you file a joint tax return ($61,000-$71,000 Single/Head of Household) being that you are covered by an employer plan. If you make too much to make a deductible contribution then you might want to look to the Roth IRA however your ability to contribute to a Roth IRA is limited if your Modified AGI is $184,000 to $194,000 for joint filers ($$117,000 to $132,000 single/HOH). If you are over this amount then you would consider a non-deductible IRA and potentially convert it to a Roth (no income limit to convert) supposing you have no other IRA funds (if you do a pro-rata rule applies and may not be worthwhile).

The 401k contribution limit is $18,000 with a $6,000 catchup if you are over 50 (which I’ll assume you are not for purposes of this answer). Similar to the answer above on contributing to a Traditional IRA and a Roth IRA, you can contribute to both your 401k and your Roth 401k as long as the total does not go over $18,000. The amount you contribute to the 401k or Roth 401k has no impact on the amount you can contribute to an IRA (but does affect whether you can deduct it or not).

So if you have the money you can put $5,500 ($1,000 CU) to any combination of IRA and Roth IRA plus $18,000 ($6,000 CU) to any combination of 401k and Roth 401k for a total of $23,500 ($30,500 if over 50).

Now whether you should put more in the pre-tax versus the Roth (tax-free) is essentially a function of what your marginal tax bracket is now versus what you think it will be when you take the funds out. If you think you will be in a lower bracket in the future then pre-tax is the way to go, however if you think you will be in a higher bracket and/or you think tax rates are going up (due to terrible government debt) then Roth can be the way to go. If you’re not sure you can diversify to both which is not a bad idea. The pre-tax vs. Roth is really like any other investment except that you are betting on tax rates. One will be better than the other but you won’t know until the future arrives which is the same reason we diversify between stocks and bonds, between US and international and emerging markets, and Large cap and small cap, and growth and value, etc. 

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Dave Ramsey and the proposed Fiduciary rule by the Department of Labor

Dave Ramsey the financial author, radio host, television personality, and motivational speaker, recently  publicly criticized the proposed Fiduciary rule by the Department of Labor (DOL). Ramsey posted on Twitter “This Obama rule will kill the middle class and below['s] ability to access personal advice.”

To read the article from Investment News go to http://www.investmentnews.com/article/20160223/FREE/160229982/adviser-twitter-fight-erupts-when-dave-ramsey-bashes-dol-fiduciary.  

I think it is simply ridiculous to suggest that if all “financial advisors” were fiduciaries and required to act in the best interests of their clients and disclose all conflicts of interest that would somehow hurt middle class access to financial advice. While I am a fee-only advisor and prefer the model of full disclosure of compensation I do not think commissions are inherently bad. I don’t see anything wrong with selling financial products as long as all compensation, direct and indirect, are fully disclosed so that the client can make an informed decision. Therefore I see no reason why a commission based advisor could not put their clients interest first.

To suggest a fiduciary standard for all advisors would hurt access for middle class investors is like saying doctors who take the Hippocratic Oath (“…With regard to healing the sick, I will devise and order for them the best diet, according to my judgment and means; and I will take care that they suffer no hurt or damage…”) would reduce access to doctors by the middle class and the poor. Absolutely Not! This would be akin to doctors who do serve middle class and the poor not having to act in the best interests of their patients based on their judgement, etc. The idea is simply nonsense and I agree with (probably) most who have criticized Dave Ramsey in that those who are against this are so because they have a vested interest in not being required to put their clients’ interests first.

My view might be different in that I don’t think all “financial advisors” should be held to a fiduciary standard, rather that all advisors of any kind should be required to disclose all compensation, direct and indirect, as well as all conflicts of interest so that if the client wants to work with that broker/salesperson and buy their products they can at least make an informed decision. I personally might still choose to purchase a commission based product from a salesperson if they disclosed that they are not required to act in my best interest because I may feel that purchase is in my best interest and as long as I’m aware of that I can make a fully informed decision. For example if I go to buy a car the salesperson is not required to act in my best interest but as long as I have all the information I need (research on the car, truth in lending, etc) I can make a fully informed decision.

So I don’t think applying a fiduciary standard to all “advisors” will fix the problems in the industry nor do I think getting rid of all commission products will either. Rather if we had simple common sense regulations that require the full and clear disclosure on compensation, direct and indirect, as well as conflicts of interest in a manner that is understandable to the clients then we’d make some progress towards protecting the public and people could then choose who they want to work with.

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IRA Alert: Converting After-tax 401k money directly to Roth IRA

Good news from the IRS! (yes I know this is strange that I am excited about this news)

First a bit of background on after-tax funds in an IRA. Suppose you have an IRA worth $500,000 of which $50,000 is after tax funds. Any distribution from the IRA would be a portion of after-tax and pre-tax, whether that distribution is a withdrawal or Roth conversion. For example if the IRA owner took out $10,000, 10% or $1,000 would be considered after-tax. For all practical purposes the pre-tax and after-tax amounts cannot be separated just like cream in a coffee; every sip is a bit of cream and some coffee. Some people who have made after tax contributions to an IRA have mistakenly assumed that they can simply convert that IRA to a Roth tax free however this pro-rata rule applies because all IRAs of the owner are considered one for this purpose.

Ok so here's the situation with 401k's: Suppose instead of an IRA, you have a 401k plan with $500,000 of which $50,000 is after-tax funds same as above. Prior to 2009 it was common for the administrator of the 401k plan to issue two checks; one representing the after-tax funds and one representing the pre-tax funds. Then you would (assuming you were eligible at the time) convert the after-tax funds directly to your Roth IRA by simply depositing the after-tax check into the Roth account while depositing the pre-tax check in your pre-tax IRA. This strategy seemed to be a loop hole to the pro-rata rule above because IRA and employer plan rules while they seem similar do have notable differences.

Then in 2009, IRS issued some guidance on this common strategy (which I won't go into the details here) that basically indicated that the above loophole was not allowed, at least if you wanted to do this you had to go to great lengths to do it right (again I'll skip the details for now) which were essentially not practical thus the common strategy of getting the two checks to convert the after-tax funds directly to a Roth was not allowed. There remained some debate on the subject but most practitioners preferred to go the conservative route with clients and advise that this strategy was no longer allowed however many plans continued to offer the separate checks unaware of the IRS notice that went out in 2009.

Well 5 years later we finally have a definitive answer to this question from IRS notice 2014-54 which is an emphatic YES! This is really great news and makes things quite simpler for those who have after-tax funds in their 401k. It also opens up some planning opportunities that were not previously allowed which I will provide more detail on in the coming weeks after I myself learn more about this new ruling. Expect to hear more about this, and other topics after I attend the Ed Slott Master Elite IRA Advisor Group workshop in the first week of November.

If you have any questions on whether this may apply to you please feel free to contact me directly. 

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Does your Portfolio have the right amount of risk? Take this free Risk Quiz to find out!

Do you ever wonder if you are taking the right amount of risk in your investment portfolio? Does your portfolio fluctuate more than you are comfortable with but your advisor doesn't seem to validate your concerns? Is your portfolio too risky, not risky enough, or is the risk you are taking just right? How do you know?

Most investors don't have a good sense of whether they are taking the appropriate amount of risk usually because of a lack of, or poor risk analysis tools available. For example, most traditional risk questionnaires ask questions such as how old you are, your time frame for when you need the money, and whether you are focused on growth, income, safety of principal, etc. Just because a young person may have 30 years until retirement doesn't mean he/she should take a lot of risk if they are uncomfortable with high risk. Just the same, just because a 60 year old may be nearing retirement doesn’t necessarily mean they should invest conservatively as there may be other factors involved that allow that person to take more risk than a similarly aged peer. It is these, and other fundamental flaws in traditional risk questionnaires that can result in a misalignment of risk comfort and portfolio design and ultimately taking on more risk or less risk than intended both of which can potentially knock a financial plan off course.

To solve this problem, Portnoff Financial has recently partnered with Riskalyze, a cutting edge technology build on the academic framework that won the Nobel Prize for Economics that pinpoints your acceptable level of risk with unparalleled accuracy to properly align your portfolio with your risk comfort zone.

So how does it work and why is it different?

For starters, the typical flawed questions in most risk questionnaires are either eliminated or carry much less weight. Also it is difficult to understand the impact of percentage based losses or gains without the context of portfolio size so the value of your portfolio is considered and the percentage based losses are translated into actual Dollars so that you can better visualize and understand the risk you are taking. Then Riskalyze will take you through a series of questions (fewer on the simple version and more on the detailed version) aimed at helping you determine just how much downside risk you are willing to expose your portfolio to for the chance to earn a potential gain.

If you want to know if your portfolio design is aligned with your risk comfort zone, take a free brief Risk Quiz at http://www.portnofffinancial.com/free-risk-analysis.phpto pinpoint your exact risk tolerance and receive your Risk Number. After completing the quiz, you will have the option to request a free portfolio review by Portnoff Financial to compare your Risk Number with the Risk Number of your portfolio. If there is a discrepancy between the risk level of your portfolio and your risk comfort zone, Portnoff Financial can re-engineer your portfolio to better align with your Risk Number and provide you with an Investment Policy Statement including a projection for potential gains and losses that you can expect from your re-engineered portfolio. 

With Portnoff Financial and Riskalyze you can feel confident that the risk in your portfolio properly aligns with your comfort zone, investment goals, and expectations. 

To learn more about your Risk Number, or to request the more detailed Risk Quiz, schedule a 15 minute Introductory Call or a complimentary Discovery Consultation at http://meetme.so/DiscoveryConsultationor call me directly at 732-226-3113(NJ) or 949-226-8342(CA). 


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eNewsletter for 5/17/2014

The unemployment rate has been declining however we have to look beneath the surface to understand why. I've been saying for quite some time now to expect declining unemployment but it's not because we are adding all that many jobs. There are two reasons; long-term unemployed are simply not being counted and Baby Boomers leaving the workforce at increasing rates (5.5 million over the last 6 years). With less people in the workforce, the rate goes down. The declining unemployment rate also does not consider under-employment. If you were making $120,000, lost your job and all you could find was a $75,000 job, then you are counted as employed even though the economic value of what you are making is substantially less. This also extends to all of these "jobs" that have been created over the last 5 years. Are these jobs high paying or low paying? If a job paying $100,000 is lost and replaced with a $30,000 job that was created, the unemployment rate doesn't change yet the economic value of that net job creation is less. Of the 273,000 private sector jobs that were created in April, nearly 55% were below the median wage, and a full 43% were in the three lowest income tiers.

Housing prices are moving higher but mortgage applications have been declining. Mortgage purchase applications were up 9% for the week of 5/9/2014 but down 16% from same time last year. Existing home sales were down for the 7th time in 8 months by 7.5% continuing this downward trend. Prices however have increased about 7.9% over the past year. This movement seems to be dominated by investors as about 50% of all purchases were made with cash. As prices rise, the investment aspect becomes less profitable and we'll see a slowdown in these investor purchases. Meanwhile new home sales dropped 13.3% for the year while new home prices increased 12.6% for the year. This is not a good outlook as a decline in new home purchases means less middle class jobs in the housing market and less demand for related professions such as carpenters and plumbers. Now that Spring is here, it is difficult to continue to blame the Winter especially given that this has been a weak trend for some time now. Don't expect any rebound anytime soon.

Fed Chair Janet Yellen reiterated her stance that the US economy is on track for recovery but that further weakness could hold it back. She also continued that short-term interest rates would remain low for a long time. FED stimulus has the intended purpose of reducing short and long term interest rates to encourage spending. By reducing interest rates on mortgages for example, the expectation is it will convince people on the fence of buying a home to do so. The problem is two-fold; first this is bringing future purchases into the present which leaves fewer people to purchase later and it only encourages people who are at the margins to move forward. This is why housing will continue to struggle.

A reasonable guide to the direction of the housing market lies in the difference between buyers and sellers. Someone who is selling a home to purchase a new home creates little demand as such moves are mostly lateral or because of a home upgrade. The biggest driver is new home buyers which are young people forming their own households which has been on the decline for reasons such as lack of jobs and high student loan debt. Net sellers of homes are generally older people who become sellers when they either move into a child's home, nursing home, or they die. Either of these events usually is followed by the house sale. So if we want to get a sense of net demand, we look at buyers who peak at age 42 on average and di-ers who sell on average at age 78 in the US.  

As we can see there was a peak around 2001, a decent  bounce from 2009 to 2013 and then a clear trend downward for years to come. In other words, past 2013 we should expect to see more people selling their homes than there are people to buy homes and when you have more supply and less demand, prices go down. And no amount of stimulus is going to create people that will need, want, and be able to buy homes. Its demographics, its baked in the cake, and we just need to be prepared for it and have reasonable expectations when it comes to home price appreciation.

Another warning sign: Margin Debt.

Margin debt (borrowing) to buy stocks spiked to new highs recently which also happened just before the 2000 and 2007 crashes. Stock market peaks seemed to correspond to peaks in real margin debt as we see here in 2000 and 2007. Currently the real margin debt is nearly at the level it was in 2007 just before the market started coming down. Those peaks seem to come after a sharp acceleration in margin debt which we are seeing recently. Definitely cause for concern.

Also it is interesting how the S&P 500 has been closely following a Theoretical Bubble Progression Model. We keep bouncing around these historical highs; the market hits the upward resistance, drops down a bit, comes back up to slightly new highs, but the progression of this is narrowing meaning that the dips are smaller and smaller and the new highs are also smaller and smaller. At some point in such a model it breaks down and that's when the bubble bursts. Unfortunately most people don't see bubbles until it's too late and these bubbles tend to burst much faster than they build. Trends like this simply cannot continue forever because eventually prices get excessive, demand dries up, and then prices come down. There is no exception in history! How long it can continue is another matter. Look at how the DOW ran up from November 1994 to January 2000 which no one debates was a bubble, and compare how the DOW has risen from March 2009 to April 2014 yet few seem to think we are in a bubble now? 

(Source: Yahoo! Finance, 2014)

Just remember that the bigger the bubble the bigger the burst. When we zoom out and look the DOW since the mid-90's, we see what is called a "megaphone" pattern marked by higher highs and lower lows. 

(Source: Yahoo! Finance, 2014)

If this pattern holds, it predicts the DOW going to around 17,000 by mid-2014 and then a drop to somewhere lower than 6,000 by around late 2016. So it is possible to have a few more good years with stocks but being prepared and braced for the worst case scenario is the prudent strategy.  

Chinese Purchasing Managers Index (PMI) came in at 48.3 showing continued contraction. AS China slows, they are letting their currency begin to devalue which makes exported good cheaper to the rest of the world. Just another sign that China is slowing and as they slow, supply chains in other countries will be affected.

You can't solve a debt crisis by adding more debt and hoping that the economy will improve and that the market will keep going up is not a strategy. We need to consider all of the warning signs and decide for ourselves how we will act and protect ourselves from the possibility that our hopes don't play out as we would like them to. 


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eNewsletter 5/2/2014

I was recently quoted in MarketWatch, a Wall Street Journal online publication in the article, "Beware these IRA rollover mistakes" by Robert Powell. You can read the article at http://www.marketwatch.com/story/beware-these-ira-rollover-mistakes-2014-01-28?pagenumber=1.


Market Update

Stocks have been overbought for some time now and the recent sharp decline in January may be only the beginning of this massive bubble bursting. People, government officials, and economists alike are simply in denial about how bad things are and there will be an end to this craziness eventually. Year to date stocks have not really done much over all except the bounce around record highs. The trend has clearly shifted from an upward market to sideways. Typically after a run up the market will "consolidate" and level out until it either breaks up or down. This recent change in the trend could just be a pause on the way to more record highs or we could be setting up for a downward change in direction.

We've all been to a social gathering where after a while the first person decides to leave which causes other people to feel comfortable to leave and then shortly thereafter everybody clears out except for the usual stragglers. This is basically a description of "The Minsky Moment" named after Hyman Minsky, an economist who suggested that markets are inherently unstable. This is based on the idea that long periods of speculation tend to lead to crises and the longer the speculation the worse the crisis gets. So we can see markets going up until the first start to leave which is usually the "smart money" which causes others to leave and then we get a "Minsky Moment" like 2008.  If we look at past bubbles of almost any kind, we see two results: first, bubbles always burst, and second they tend to return to about where they started.

The U.S. Government has been putting in $2 Trillion in stimulus annually; $1 Trillion in deficit spending and another $1 Trillion in monetary stimulus (QE). Stimulus has been a huge tailwind in keeping the economy afloat and causing the financial markets to rise to all time highs. These tailwinds will become headwinds at some point when the stimulus is stopped and the deficit spending becomes unsustainable and our debt burden too high. For now it seems that Quantitative Easing has been working but may be showing signs of fizzling out as the stimulus is tapered.

Interest rates have finally began a meaningful rise from a low of 1.38% to over 3% and recently hovering around 2.6%. As the stimulus continues to be tapered, we are likely to see bond rates rise which is not good for long-term, intermediate term, and high-yield bonds. As the FED continues to taper, this means they will purchase few bonds which will likely mean a decline in demand. As the demand declines prices go down and yields go up.

Increasing rates will hurt the housing recovery, large purchases using debt such as cars, consumer spending on credit, etc. Once this happens, expect to see significant economic slowdown. Increasing rates will also make our ability to pay government debt more difficult. Then what does the FED do? Stimulate again to juice the economy again? The problem is the law of diminishing returns which says that the more you have of something (in this case stimulus), the less value we get from it. Think about that first cup of coffee in the morning; it wakes you up but you eventually get tired so you take another cup, but the second cup doesn't have the same effect as the first. I think we are getting closer to a point where it will be evident that the stimulus didn't work long-term and our ability to stimulate more will be hampered and the deleveraging and deflation will commence.

For bond investors this creates some problems. The stock market is risky so the conventional alternative is bonds however rising rates will hurt bonds. A typical intermediate term bond fund has a duration of about 4-5. Duration is a indicator of sensitivity to interest rates. A duration of 5 means that for a 1% increase in rates, you would expect a decline of about 5% in your bond fund. The conventional way to reduce this risk is to shorten your duration by going to shorter term bonds. Unfortunately the yield on short-term bonds is quite low and are still negatively affected by interest rate increases. The real question continues to be what the markets will do when rates start rising again and we see even lower or negative growth with this stimulus.

Recently housing has shown some positive price gains however it appears that almost half are cash sales which implies that it is speculators, investors, and financial institutions are behind these purchases. These positive gains could explain the recent surge in pending home sales last year. It's clear that sales have been going up and inventory has been going down which is typically a healthy sign for housing.

To understand where housing is going we need to look at demand; who is buying versus who is selling. When a person goes into a nursing home or dies, they become a seller by default. Therefore a great way to get an idea of where demand is headed is by looking at the number of buyers vs. dyers. People tend to buy their trade up home in the US around age 42 on average and die at age 79 on average. The projection clearly shows a greater number of dyers than buyers and thus the net demand for housing should begin to decline again starting next year. The decreased demand and increased  supply will push housing prices down. This is not for all housing however and does not apply to all regions. For example, those in the northeast tend to migrate to Florida as they age which could cause a net decline in demand to happen sooner than expected.

People don't buy homes based on prices or interest rates, rather they purchase a home based upon a payment which is determined by both prices and interest rates. With interest rates beginning to rise and if prices stay the same, payments rise thus housing will become less affordable unless median incomes rise substantially which doesn't seem to be likely anytime soon. US real (inflation adjusted) disposable income fell 9% in the past 12 months (as of June 2013). Consumer spending typically drives about 2/3rds of our economy. With disposable income falling, this means less money to spend, especially on discretionary items. Another warning sign. This certainly will not help housing. An increase in supply coupled with increasing interest rates is a recipe for declining prices which we will probably start to see in the not too distant future. In addition, the shadow inventory of homes continues to be the biggest hidden threat to the housing market. If the economy begins weakening again, the institutions that have been holding out for higher prices may finally begin to sell that inventory if prices start declining. Increased borrowing rates should also have negative impacts on car loans as well.

Traditional economists don't seem to understand why we are not seeing inflation despite the massive amount of money being pumped into the economy. The reason is that when an economy is at this stage of the cycle after a credit crisis, people don't borrow as much and banks don't lend as much. This slowdown in the fractional reserve system means less money in the economy which is the offsetting deflationary force to all the money printing.

The average bull market lasts nearly 4 years. If you take out the one extremely long bull market which lasted about 12 years and the shortest from 87. These bull markets are followed by an average 36% decline. The current bull market is over 5 years long. Volatility tends to increase at major long term tops such as 1966 - 1974. The first decline after 1965 saw a 26% decline, the second after 1968 was 37%, and the third after 1972 was about 50%. Take notice of the current secular bear market since 2000 which saw a 51% decline after 2000 and a 58% after 2007. So if the pattern continues and we see a third decline, it could easily be 65% or more.

Warning signs we're near a top:

  1. Margin Debt at $400 Million: Margin debt is approaching the 2007 peak at $430 Million and higher than the $390 million at the peak of the Tech Bubble in 2000. This suggests we are seeing more speculation and leverage in this bubble.
  2. Stock Buybacks close to 87%: Companies are aggressively buying back their own shares using super low interest rates. This has the effect of artificially boosting Earnings Per Share (EPS) because the number of shares outstanding has been reduced. Currently 83% of S&P 500 companies are buying back their own stocks which is getting close to the 87% it was in the 2007 peak.
  3. Corporate Profit as a percentage of GDP is above 11% and is at record levels. Fed stimulus via low interest rates has boosted corporate profits more than any boom in history. At the 2007 peak, corporate profits/GDP were 10%.
  4. P/E Ratios between 24 and 27: Most major stock peaks happen when P/E (Price to earnings) ratios are between 22 and 27 except for the extreme tech bubble when they reached about 45 and the peak in 1929 at 32 and these periods had the advantage of strong demographic trends and accelerating productivity from new technologies which we do not currently have. At the 2007 peak P/E's were 27. We're currently about 24 and moving higher.
  5. Market value of non-financial stocks divided by GDP ratio above 1.3: During major market peaks, this ratio tends to be between 1.0 and 1.5.
  6. 62% Bulls vs. 20% Bears: Many of the people that got scared out of the markets in 2008 have been returning since 2012. When Bulls vs. Bears gets to this level, that tends to suggest peaks although we did reach this level in 2010 before backing off back to about 40% Bulls. As everyday investors continue to pile in, we watch for the "Smart Money" to start exiting and when that happens, watch out!
  7. As January goes, so goes the year: When January is a negative month often that forebodes a negative year. After 5 years of a stimulus led bull market that is long overdue for a correction, this saying may be true this year.
  8. The second year of a 4 year presidential cycle tends to be bad for stocks.

Governments keep borrowing at below market rates to run budget deficits by purchasing their own bonds, companies buy back their own stock with super low interest rates to boost earnings per share, banks take QE stimulus money to boost their reserves in anticipation of the massive losses they expect when the economy turns back down and to speculate in financial securities with 30-50 times leverage causing margin debt for stocks to near and all time high; You tell me, are these signs of a bubble? Looking back I suspect all the "experts" will say we should have seen this coming. 


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2013 IRA Contribution Reminder

It's not too late to make an IRA contribution for 2013. The deadline is the tax filing date which is Tuesday 4/15/2014 this year however generally it is not a good idea to wait until last minute.

Individual Retirement Accounts (IRA) are tax deferred, or in the case of a Roth IRA, tax-free savings/investment accounts. Tax deferral allows your money to grow faster without losing some of the growth annually to taxation. Having investments in an IRA also allow you greater investment flexibility to make changes without having to worry about generating any taxable capital gains transactions.

The IRA contribution limit for 2013 is $5,500 to any combination of IRAs and/or Roth IRAs as long as the total doesn't go above $5,500 unless you qualify for the catch-up contribution which is an additional $1,000 if you reached age 50 by year-end 2013.

Anyone is eligible to make an IRA contribution as long as you have earned income and you are under 70 1/2; w hether you can take a deduction for a traditional IRA depends of a few factors described below. Eligibility to  contribute to a Roth IRA depends on income which is also described below; t here is no age limit to make Roth IRA contributions .

 

Phase-Out Range for IRA Deductibility

If you are considered an active participant in a company retirement plan, your deductibility for an IRA may be limited. If you are married filing jointly the phase-out for deductibility begins for adjusted gross income between $95,000- $115,000; above that there is no deduction. If you are a single or head of household filer the phase-out for deductibility begins for adjusted gross income between $59,000- $69,000; above that there is no deduction. If you are not covered by a company plan but your spouse is, the phase-out range for you is $178,000 - $188,000. If you file married-separate, your phase-out range is $0 - $10,000. If your income falls between the phase-out range, your ability to deduct your IRA contribution will be limited. There is a specific calculation to determine the amount you can deduct so if this applies to you, consult your tax advisor to determine how much you can deduct.

Even though you may not participate in the company plan, you may be considered an "active participant” so it is important to verify before attempting to take a deduction. If you and your spouse (if applicable) are not covered by a company plan, then there is no income limitation to take a deduction for an IRA contribution. SEP and SIMPLE IRAs are considered company plans for these purposes but are not included in the maximum contribution amount as they have their own limits.

 

Eligibility for Roth IRA Contribution

If you are married filing joint, the phase-out of eligibility to contribute to a Roth IRA is between $178,000 - $188,000 of adjusted gross income; above that you cannot make a Roth IRA contribution. For single or head of household filers, the phase-out for eligibility is $112,000- $127,000. If you file married-separate, your phase-out range is $0 - $10,000. As mentioned above, if your income falls between the phase-out range, then your ability to contribute to a Roth IRA is limited. If you are above, then you cannot contribute directly to a Roth IRA however you are still able to convert IRA funds to a Roth IRA which is discussed below.

 

Non-deductible IRAs

If you wish to make a deductible IRA contribution but make too much income to be eligible to take a deduction, consider a Roth IRA instead. If your income is above the threshold to make a Roth IRA contribution, you can still make a regular IRA contribution however that contribution will not be deductible. In such a case of a non-deductible IRA contribution, your money goes in after tax but still grows tax deferred and your contributions when withdrawn are not taxable however the interest/gains will be taxable upon withdrawal.

These non-deductible contributions create "basis” in your IRA which when withdrawn come out tax-free in a pro-rata distribution relative to the amount of pre-tax money in your IRA. For example, if you have $100,000 in your IRA, $10,000 of which is after-tax basis, your ratio would be 10%. If you then took a distribution/conversion of $25,000, $2,500 of that would be considered a return of your basis tax-free while the $7,500 would be taxable.

 

IRA to Roth Conversions

Since 2010 anyone regardless of income can convert an IRA to a Roth IRA. This means that you could make a non-deductible IRA contribution and convert it to a Roth thereby getting after-tax funds in a Roth IRA which is in essence the same as making a Roth IRA contribution. This strategy only works however if you do not have other IRA funds because if you do, the pro-rata rules described above would apply. It is unknown if this loophole will be closed by congress or if they will allow anyone regardless of income to make a Roth IRA contribution; only time will tell.

 

2014 IRA Limits

For 2014, IRA contributions limits stay at $5,500 if under 50 with the additional $1,000 catch-up contribution if you reach age 50 by year end. The phase-outs for IRA deductibility and Roth IRA contributions go up a bit: 

  • IRA deduction phase-out for active plan participants
    • Single $60,000-$70,000
    • Married filing jointly $96,000-$116,000
    • Married filing separately $0-$10,000
    • Spousal IRA $181,000-$191,000 (you are covered but your spouse is not)
  • Roth IRA phase-out
    • Single $114,000-$129,000
    • Married filing jointly $181,000-$191,000

If you have any questions about IRA contributions or wish to make an IRA contribution for 2013, contact me directly.

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Taking Off the Training Wheels

While we are managing our personal economies by spending, saving and investing, the Fed is managing the entire American economy. This is where the fight starts.

The Fed wants you to spend more, particularly by taking on loans. The best thing to do – from the Fed’s point of view – is to buy a new home. Many of us have other plans. We are trying to get our household balance sheets back to normal and save for retirement.

While you may be "fighting the Fed" it is important to understand that any potential change in Fed policy can impact your personal economy and your portfolio. Lately the Fed has been in the news a lot. My job is help you make sense of all the noise out there.

Federal Reserve Chairman Ben Bernanke recently announced that the Fed may begin to taper its quantitative easing program by the end of the year. In plain English, this means that the Fed might slow its easy money program that has kept interest rates at very low levels.

This sent investors scrambling, causing a sell-off in the stock market. If interest rates go up then it costs more to borrow thus slowing an already sluggish economy. After watching the markets react badly to the tapering talk, the Fed quickly responded by holding a press conference to assure investors and clarify its position. Such action will only take place if the right economic conditions are met.

So why this recent announcement by Bernanke? According to the chairman, the economy is showing real signs of strength, making quantitative easing less necessary. He can cite the rise of home prices and recovery of the stock market to support his case. But there are still cracks in the economic ship. A recent survey indicated that 76% of Americans are living paycheck to paycheck. Unemployment hasn't been under 7% since November of 2008 and is currently at 7.6%. The Fed can do what it wants to, and that’s what scares the markets.

We may once again be entering new territory. Just as nobody knew what was going to happen with unprecedented amounts of monetary intervention by governments and central banks, nobody knows what will happen when these programs stop.

The immediate fallout from Bernanke's announcement indicates that we may be seeing increased uncertainty and volatility in the markets. The rise of the markets from their 2009 bottoms have been based on investors knowing the Fed would print money and provide easy credit. With a Fed pullout looming, investors know that assets and borrowing costs will have to adjust. This adjustment period mean the markets might gyrate.

We knew this day was coming and have been talking about it for some time. We have formed a plan around these economic eventualities to help you achieve your goals of building wealth and economic security. We cannot change what the central bank does, but we can choose how we react to its policies. We are here to assist you by not only building your financial plan, but helping you stick with it in the face of more volatility and uncertainty.


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The Fate of the Twinkie

Perhaps no other product has captured the attention of Americans in recent months than the humble Twinkie, whose parent company is in the final stages of its bankruptcy proceedings.  If you are like me, you probably haven’t eaten one in years.  But there is something about the little yellow cake that is iconic and…well…American!

So, the bankruptcy of Hostess Brands late last year felt like a strong kick to the gut for many of us. The immediate cause of the bankruptcy was a labor dispute with the bakers’ union.  But Hostess’ problems ran much deeper and point to a much larger trend in the U.S. economy.

When was the last time you bought a Twinkie?

I ask not to belittle the brand but to make a point.  The poor Twinkie is a victim of changing demographics.

The Baby Boomers bought Twinkies by the millions for their children, the Echo Boomers.  The Echo Boomers were the second-largest generation in history (after the Baby Boomers themselves), so satisfying their sweet tooth was a profitable endeavor. 

Unfortunately for Hostess, the Echo Boomers grew up.  Most are out of college now, and many have started families of their own.  And as a generation, they—along with the smaller Generation X—are a little more health conscience as parents.  They are more likely to throw a banana into their child’s lunch box than a Twinkie.

Of course, Twinkies are not the only iconic brand that has been on the wrong side of a demographic trend.  Consider Harley-Davidson. 

Imagine the "typical” Harley rider: a white male in his 40s or 50s.  When the Baby Boomers entered this key age range two decades ago, it created the biggest boom in the company’s history.  But nothing lasts forever, unfortunately.  Those same Boomers who once bought Harleys are more likely to buy an RV today.  Generation X is not large enough to make much of a difference, and the Echo Boomers are still a few decades away from their motorcycle-riding mid-life crisis. 

As investors, it’s easy to get distracted by the headlines and by the fast pace of news that hits us every day.  But the truth is that the forces that ultimately matter most to a company’s health—and to the health of the entire economy—are slow moving and very predictable.  An understanding of demographic trends would have helped you foresee the difficult times for both Hostess and Harley-Davidson.  And they can also help you predict the next boom.

I expect a new baby boom at the beginning of the next decade that will be very profitable for those investors willing and able to get in front of it.  And that is exactly what I intend to do.
 

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