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January 2014

Uncertainty Is the Only Certain Thing

Uncertainty Is the Only Certain Thing

Each morning we wake up with a set of assumptions: the sun will rise, our light switches will work and water will flow from our faucets. We expect roads to be passable and our government to keep our systems of law and commerce operating. While some things seem beyond question (the sun really will rise in the east), others are up for debate. What happens when the systems on which we rely become unpredictable?

As we head into October we’re facing increasing uncertainty on a number of fronts. In Europe there’s talk of yet another Greek bailout. The nation is now in its sixth year of recession, still struggling with debt repayment, high unemployment and a lack of growth. If that isn't bad enough, there are now calls for a Special Forces Reserve Union military coup. Meanwhile, the International Monetary Fund (IMF) expects Spanish unemployment to remain above 25% for at least the next five years. Spain’s real estate market is in free-fall, refusing to find a bottom. Today, the situation in southern Europe is no more certain than it was at the onset of the global financial crisis.

Back home we have our own worries. For months the members of the Federal Reserve Open Market Committee (FOMC) hinted that they would start to wind down the quantitative easing (QE) program. Then in late September, just when everyone thought the Fed would announce a start to the long-anticipated taper, chairman Ben Bernanke said the economy was not yet strong enough to stand on its own and QE would continue indefinitely. Naturally, this confused almost everyone. It was as if the Fed, which had been signaling a slowdown for months, came out and said: "Just kidding!" It appears the Fed has no idea how it will smoothly wind down QE. In its attempt to create more open communication and guidance with investors, it created more uncertainty, not less.

If market confusion isn't enough, the U.S. federal government decided to pile on at just the wrong time. We face yet another debt ceiling deadline in mid-October. Rather than attempting to agree on a sustainable and workable framework for government spending, our elected representatives instead have decided to play a game of political chicken. At stake is a shutdown of the federal government. While our expectations of government performance may be low, we at least expect it to remain open.

One of the bones of contention in the debt ceiling debate is funding for the Affordable Care Act (ACA). On October 1 the ACA goes live and it appears few people know what that means. In fact, a recent USA Today/Pew poll found that only 25% of the respondents claimed to understand the new health care law very well. Others don’t know how they will get insurance, much less pay for it. Given that obtaining insurance is now mandatory, this qualifies as a level of chaos.

Each of these trends and situations is weighing on capital markets around the world, causing volatility and a lack of direction. We expect the smoke to clear on some of these issues, like the debt ceiling and budget debates in the U.S. While this would likely give some relief to equities, such relief would only be fleeting, as there is always another worry right around the corner. That’s why we develop, maintain and consistently reassess our financial plans to make sure we’re taking the best direction possible given the facts on the ground today.

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Why Labor Day Matters

For many Americans, Labor Day represents the unofficial end of summer. It’s a day for last trips to the beach, and for firing up our grills to cook some burgers and hot dogs. The holiday represents a break between the craziness of summer and the beginning of fall, when we all take work seriously again. For whatever reason, we need a day off to make the switch.

But Labor Day wasn’t always just a day off at the end of summer. In the late 19thcentury, organized labor was gaining strength across the country. Unhappy with wages and working conditions, they staged protests and strikes that would often end in violence. As a way of easing tensions, local governments and a handful of states passed laws to recognize what unions were calling "labor day." In 1894, President Grover Cleveland signed the law that made Labor Day a national holiday as a way to honor the American worker.

Over the years, our workforce landscape has changed, and with it, the meaning of Labor Day. Just over 11% of workers are members of organized labor, roughly half the level of 20 years ago. Most of us are so detached from organized labor, and the origins of the national holiday, that we simply enjoy having the day off work.

Now, as our workforce changes, this is a three-day weekend that fewer of us are able to enjoy.

Chances are that if someone got a new job in 2013 he won’t be celebrating a day off on September 2. With part-time workers making up 77% of new hires in 2013, it’s just another Monday on the job. 

These jobs typically don’t provide paid leave for holidays, like Labor Day. In fact, many retailers have sales promotions to draw in customers that may have the day off. Big-box retailers and department stores will be scheduling extra workers to meet anticipated demand.

This shift to more part-time work is indicative of greater changes to our labor force. It means workers have to accept lower levels of take-home pay than they’re accustomed to. So they’ll have less to contribute to payroll and income taxes. And they’ll have less money left over to grow the economy with their discretionary spending. 

People drive our economy. Personal consumption expenditures account for nearly 70% of the nation’s gross domestic product, by far the biggest share of its components.

We follow predictable spending patterns, which are largely dictated by our age and stage of life. Even so, there are limits. We can only spend what we have and borrow as much as our income allows.

With more and more people having to settle for part-time work and lower pay, consumers will choose the necessities over the luxuries. They will also delay making the big life purchases of a home or a new car. These workers will have less money to save and invest in the stock market.

It may sound bleak, but it isn't. By spotting the movements in the labor market, we can anticipate how it affects the broader economy. We can look out over the horizon to spot the risks and target the opportunities in the market. This puts us in a stronger position to maintain and grow your savings and investments.

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Putting On Your Diapers One Leg at a Time

Diapers instinctively make us squeamish. We don’t want to smell them, see them or be around them. But what if they were the next big opportunity!?

In Japan, more than 20% of the nation’s nearly 130 million people are over age 65, and the market for adult diapers is growing at 6% to 10% per year.

Adult diapers are more profitable than their baby counterparts because adults will pay a higher price and can potentially be using them for many years. Even better, there is a technological innovation coming in the world of diapers.

Diaper maker Pixie Scientific is launching a diaper for babies that contain urine testing strips positioned on the outside of the diaper. Parents can scan the results via a Smartphone with the company’s Smart Diaper app. The app will notify the user of the test results and send an alert if the wearer needs medical attention.

Seeing the potential for a product that could serve both the incontinence and at-home health monitoring needs of the elderly, our friends at Dent Research reached out to Pixie Scientific to see if they had the same idea. Dixie reported they initially made the diaper for children, but after being inundated with questions about adult sizes, the company is now focusing on developing the Smart Diaper for all ages. We aren’t surprised.

Whether Pixie Scientific is a good company or a bad company is not the point. The issue here is the changing nature of demand as our country ages. Japan has the oldest population of all the developed countries, but the rest of us – the U.S. and Europe – are not far behind. If Japan is waist-deep in the adult diaper industry, then the rest of us are just putting our first foot in.

We watch consumer habits because we believe people, and how they spend money, drive the economy. Consumer spending patterns move the ebbs and flows of industries and sectors. We can spot these trends by watching how people shift their buying habits as they age.

As the mass of Baby Boomers moves into old age, industries that cater to this group will grow and expand. This will provide new investment opportunities for the makers of products like adult diapers. You have the advantage of being part of a team that has been tracking these changes for years so we can spot the opportunities as they arise… even if they come in a diaper.

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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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A Tale of Two Realities

The world has gone crazy. You need to stay sane.

If you watch the news, or read through a list of current economic statistics, things look pretty dismal. Growth is weak. Income is flat. Consumer spending has slowed. European countries are struggling with high unemployment. Youth unemployment is over 40% in four of those countries – Greece, Italy, Portugal, and Spain – and is high in the U.S. as well, currently 16.1%.

Meanwhile, governments are running large deficits and central banks are printing mountains of cash. College-bound kids are piling on mounds of debt and struggling to find jobs after graduation.

But if you look at the equity markets, things appear bright and sunny. We’re near record highs. Companies are awash in profits. Interest rates are exceptionally low.

How is it possible that these two worlds – economics vs. financial markets – can peacefully coexist? The short answer is, they can’t. The more involved answer is, they can’t peacefully coexist for long.

Right now the economy is suffering from a lack of demand. We know this and have warned about it often. That lack of demand is a normal part of our economic cycle that occurs when the largest group in the economy (the Boomers) enter the phase of life where saving is more important than spending. This lack of demand is compounded by a dramatic reduction in the people (beyond college students) who want to take on credit. These two trends result in a slack economy, shown through high unemployment and stubbornly low wages. This makes perfect sense; but it’s also where things get tricky.

The government and the Federal Reserve recognize this lack of demand, but they aren’t sure how to fix it. The Fed only has a few tools – like interest rates and money printing – so it does what it can. The Fed is busy keeping interest rates low and printing money. This is a fabulous recipe for pushing stocks to the moon because it makes other investments, like bonds, less attractive. The problem is that the efforts are not actually fixing our economy. We are muddling through and, at this point, we’re somewhat resigned to a low growth level.

But the Fed keeps printing, so the market keeps rising. This is short-sighted, but it’s where we are. The problem comes in when the Federal Reserve considers slowing its efforts. This hasn’t happened – yet – but the members of the Fed Open Market Committee (FOMC) discussed at their last meeting, which ended May 1, how and when this might occur. When the minutes were made public, the market swooned.

Now, keep in mind that nothing economic had changed. We were, and are, in the same place as we were before the Fed minutes were published last month. The only thing that has changed is that market participants are acknowledging the Fed might actually quit printing $85 billion a month.


So here we are, with stubbornly sluggish economic numbers that have brought on a massive response by our central bank, and equity markets that are reacting to the central bank, not the economic numbers.

It makes no sense, but it’s where we live. So our job is to recognize the craziness in the system. The markets are not reflecting a healthy economy, but instead are reacting to the size of the Fed’s intervention programs. We’ll watch these programs closely, because they hold a key as to when the markets could take a break from their long march higher.

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