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Lower Oil, Less Looking For It

 

                                                                                           March, 2015

You already know that oil prices are lower than they have been in a long time, in part because U.S. oil production is higher than it has ever been, and still climbing steeply. But you have to wonder how long these conditions will last, since lower oil prices make it less economical for oilfield services companies to drill.

The accompanying chart, courtesy of the oilfield services company Baker Hughes, may be the most dramatic illustration of economic reality you will see this month. It shows how the U.S. has increased the millions of barrels of oil per day that we’re pumping out of U.S. soil in the past four years. Looking at the orange line rising ever-more-steeply, you wonder whether oil prices will ever go back up to previous levels.
                                                         

But then you see the purple line, which tracks the number of active oil rigs that are out there looking for new sources of oil. The last quarter of 2014 and the first few months of this year have created a dramatic bear market for drilling rigs in action. In just two fiscal quarters, the number of rigs in the field has dropped by almost half, and there is no sign that the trend is slowing down.

What does that mean? Nothing in the short term, since the orange line represents existing production. But longer-term, you have to expect that fewer active rigs will mean fewer wells and, at the very least, a leveling out of that orange line. Oil prices may be down today, but that doesn’t mean supplies will outrun demand forever. Enjoy the low gas prices while you can.

Sincerely,

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

Source:

http://www.bloomberg.com/news/articles/2015-03-06/oil-rigs-get-slammed-for-the-13th-weekbobveres.com

This material was prepared by BobVeres.com., 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.

 

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Will Social Security be there when I retire?

 

February, 2015

Social Security’s future solvency has become one of the most commonly-discussed issues in retirement planning—and for good reason. Gallup polls show that an estimated 57% of retirees rely on Social Security as a major source of retirement income—a number that has held steady since the early 2000s. But when Generation X and Y individuals plan for their future retirement, they’ll often ask their advisor to assume that Social Security won’t be there for them 20 or 30 years down the road. 

However, if you look closely at the numbers, you see a very different story. Up until 2011, the Social Security system actually collected more revenues from workers’ FICA payments than it paid out—and that has been generally true since the 1940s. Most of the Social Security benefits that people receive today are simply a transfer; that is, the money is collected from worker paychecks (and, of course, employer matches), spends a few days at the U.S. Treasury and then is paid out to recipients. The surplus has been used to pay government operating expenses, and for seven decades, the government issued “special issue federal securities” (essentially fancy IOUs that pay interest) to the Social Security trust fund.

In 2011, the program crossed that threshold where benefit payments slightly exceeded the amount collected. Why? Because the number of beneficiaries, compared to the number of workers, has steadily increased. In 1955, there were more than eight workers paying into Social Security for every beneficiary. Today, that number is closer to three workers for every beneficiary, and by 2031, if current estimates are correct, that ratio will fall to just over two workers supporting every retired beneficiary.

When Social Security Administration actuaries crunch the numbers, they have to take into account the shifting demographics, and then make estimates of fertility and immigration rates, longevity, labor force participation rates, the growth of real wages and growth of the economy every year between now and 2078. After adding in the value of the government IOUs, they estimate that if nothing is done to fix the system, the trust fund IOUs will run out in the year 2033. At that time, only the FICA money collected from workers would be available to pay Social Security beneficiaries. In real terms, that means the beneficiaries would, in 2034, see their payments drop to 77% of what they were promised. 

In other words, the money being transferred from current workers to beneficiaries through the FICA payroll program, assuming no course corrections between now and 2033, will be enough to pay retirees 77% of the benefits they were otherwise expecting.

The government actuaries say that if nothing is done to fix the problem over the next 63 years, this percentage will gradually decline to 72% by the year 2078.

So the first takeaway from these analyses is that today’s workers are looking at a worst-case scenario of only receiving about 75% of the benefits that they would otherwise have expected to receive. This is far different from the zero figure that they’re asking their advisors to use in retirement projections.

How likely is it that there will be no course corrections? There are two possible ways that this 75% figure could go up. One lies in the assumptions themselves. The Social Security Administration actuaries have tended to err on the side of conservatism, presumably because they would rather be pleasantly surprised than discover that they were too optimistic. But what if the future doesn’t look as gloomy as their assumptions make it out to be? 

To take just one of the variables, the actuaries are projecting that labor force participation rates for men will fall from 75.5% of the population in 1997 to 74% by 2075, while the growth in female workers will stop their long climb and peter out around 60%. If male labor force participation rates don’t fall, and if female rates continue to rise, some of the funding gap will be eliminated. 

Similarly, the projections assume the U.S. economy’s productivity gains (which drive wage increases) will grow 1.3% a year, well below long-term U.S. averages and certainly below the assumptions of economists who believe that biotech and information age revolutions will spur unprecedented growth. If real wages were to grow at something closer to the post-Great Recession rate of 2% a year, then more than half of the funding gap would be eliminated. If the current slump in immigration (due to tighter immigration policies) is reversed, and the economy grows faster than the anemic 2% rates the Social Security Administration is projecting (compared to 2.5% recently), then the “bankrupt” system begins to look surprisingly solvent.

A second possibility is that Congress will tweak the numbers and bring Social Security’s long-term finances back in balance, as it has done 21 times since the program originated in 1937. The financial press often cites the fact that the total future Social Security funding shortfall amounts to $13.6 trillion, but they seldom add that this represents just 3.5% of future taxable payrolls through 2081. Small tweaks—like extending the age to collect full retirement benefits from 67 to 68, raising the FICA tax rate by 3.5 percentage points or making the current 12.4% rate (employee plus employer match) apply to all taxable income rather than the $118,500 current limit—would restore solvency far enough into the future that today’s workers would be comfortable adding back 100% of their anticipated benefits into their retirement projections.

How likely is it that Congress will take these measures, in light of recent partisan budget battles? It’s helpful to remember that older Americans tend to vote with more consistency than younger citizens. The more you’ve paid into the system, the more you expect to at least get back the money you were promised. 

The bottom line here is that if you’re skeptical about Social Security’s future solvency, then you should pencil in 75% of the benefits you would otherwise expect—rather than $0. Meanwhile, as you approach the age when you’re eligible for benefits, watch for signs that immigration restrictions are loosening, the economy is growing faster than the SSA actuaries’ gloomy projections, more people are working during traditional retirement years or yet another round of tweaks are forthcoming from our elected representatives.

Sincerely,

 

 

  

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

Sources:

http://economix.blogs.nytimes.com/2014/03/05/another-way-to-do-the-math-for-social-security-reform/?_r=0

http://www.treasury.gov/resource-center/economic-policy/ss-medicare/Documents/ssissuebriefno.%205%20no%20cover.pdf

http://www.treasury.gov/resource-center/economic-policy/ss-medicare/Documents/post.pdf

http://www.wsj.com/articles/how-social-security-benefits-are-calculated-when-you-wait-to-start-taking-them-1421726460

http://www.usatoday.com/story/money/personalfinance/2013/11/25/nine-surprising-social-security-statistics/3698005/

http://www.huffingtonpost.com/2013/02/18/change-social-security_n_2708000.html

http://www.therubins.com/socsec/solvency.htm

http://www.encyclopedia.com/topic/social_security.aspx

http://fdlaction.firedoglake.com/2012/04/30/growing-number-of-americans-expect-to-rely-mostly-on-social-security/

 www.BobVeres.com 

 

  

This material was prepared by BobVeres.com., 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.

 

 

 

 

 

 

 

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What is a currency war and how does one wage it?

 

February, 2015

Forget world wars, fought with tanks, bomb and missiles. The new form of global conflict is the currency war, which is fought with increasingly vicious keystrokes. We read in the papers that this or that country is engaged in a currency war with some other set of countries. But what does that really mean? And is the U.S. currently engaged on one of these economic battlefields?

Currency wars are fought over exports and foreign trade—which affects the relative prosperity of one country compared with the people living on the other side of the border. At the heart of the “conflict” is the idea that whenever our dollar can buy more of their euros, yen or yuan (when, in other words, our currency is strong and theirs is weak), their companies are able to sell their manufactured exports at lower prices in the U.S. market and still collect the same number of euros, yen or yuan. This gives those foreign exporters a golden opportunity to increase market share and profits at the same time. 

When sales and profits rise, their stock market goes up, and they can pay their workers more. Meanwhile, our companies, whose goods and services suddenly look more expensive, lose top-line sales, profits and stock market value.

Of course, when the dollar is weak, the reverse is true. These same general dynamics hold true for any two countries and their currencies, which helps explain why the Swiss central bank fought for five years to hold the value of the Swiss franc down to 1.2 francs to the euro for a number of years, and why it was so shocking when it abruptly gave up the battle. When the bank let the Swiss franc rise to its fair market level, Swiss manufacturers complained that overnight their products were suddenly 12% more expensive than they had been the day before.  Many faced the choice of seeing sales diminish to zero or lose money on everything they sold in the Eurozone. Companies all over the country are cutting jobs, asking workers to work longer or requesting government subsidies.

So the bottom line is that the “winners” of a currency war weaken their currency compared with others, while the “losers” end up with a strong currency that can buy more imports for less. 

But how, exactly, do you wage a currency war? One way is to create or eliminate free currency. The U.S. Federal Reserve can create more dollars by simply keystroking more of them into bank reserve accounts. (It could theoretically do the same thing for your account, but don’t hold your breath.) Or the U.S. Treasury could issue more bonds. Alternatively, the Fed can keep its Fed funds rate at zero, which tends to raise the amount of money that banks loan to their customers and therefore the overall money supply in circulation. 

Other countries, meanwhile, can “fight back” by issuing more government debt and using the money to buy Treasuries for their government account, raising the amount of their currency on the market and decreasing the number of dollars. This is how China has managed to keep the yuan on par with the dollar. In fact the Chinese government has been so active in buying up Treasury bonds that the government gave it a direct computer link to Treasury auctions, the only country with such access. The Chinese central banking system owns an estimated $1.25 trillion (face amount) of Treasuries, in an intervention program that has helped make Chinese exports inexpensive in the U.S. Japan, the second-most-active currency warrior, now holds $1.24 trillion worth of Treasuries.

Meanwhile, the Federal Reserves various QE programs, which had one arm of the government buying the bonds of another arm of the government, have been described as frontal attacks in the currency wars.

So whenever you read that a central bank has lowered its reserve rate or is buying the bonds of its own country—as the European Central Bank did recently in an effort to revive the euro economies—it is on the attack in the global currency battlefield.   Whenever you read about a strong dollar, you know that the U.S. is losing the currency wars. The weaker the dollar, the more competitive U.S. exports will be on the world markets, and the more inclined people in the U.S. will be to purchase products made in America.

But how, exactly, do these wars affect you? When the dollar is strong—as it is now, relatively speaking, against the euro—it means that your trip to Paris or Stockholm will be cheaper, and so will the meals and cab rides you pay for over there. So if you’re planning to travel abroad, it isn’t so terrible if the U.S. is temporarily losing the currency battles. 

In addition, when the dollar is strong, your cost of living tends to be lower, because the cost of foreign products—of which the U.S. bought an estimated $2.6 trillion worth last year—are cheaper. And of course if you buy American, it doesn’t really matter to you who happens to be winning this round of the currency wars. Unlike the bloodier kind of war, the impact of winning or losing on the currency battlefield aren’t threatening your personal—or financial—survival.

 Stay warm!

 Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives

 

Sources:

http://www.tradingeconomics.com/united-states/imports

http://internationalinvest.about.com/od/foreigncurrencies/a/Currency-Wars-And-How-They-Start.htm

http://useconomy.about.com/od/tradepolicy/g/Currency-Wars.htm

http://useconomy.about.com/od/criticalssues/p/dollar_collapse.htm

 

http://www.bloomberg.com/news/articles/2015-01-16/china-s-treasury-holdings-decline-as-japan-s-rise-to-record

www.BobVeres.com

  

This material was prepared by BobVeres.com., 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.

 

 

 

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The Swiss Franc and Your Portfolio

 

January, 2015

You’ve almost certainly read about the recent drop in the global (and U.S.) stock markets, as a result of the “shocking” announcement by the Swiss central banking authority that it would not force the Swiss franc to trade at 1.2 euros. Be prepared to be shocked: you can now buy a Swiss franc with a euro.

If you’re like most of us, you’ve probably wondered why this shocking development would have anything to do with the enterprise value of the individual companies that make up the various global indices. What’s the story here?

The story is actually pretty simple—and surprisingly, it isn’t being told very clearly in the press. The Swiss National Bank had been artificially holding the Swiss franc at 1.2 euros for the past three years. Why? Because the value of the euro has been sinking on global markets. A lower euro means everything manufactured in the Eurozone is less expensive for outside buyers, which is great for exports. By keeping the franc at a steady cost vs. the euro, the Swiss National Bank was protecting Swiss watches, chocolate products and high-end medical diagnostic equipment from becoming more expensive in the countries where Switzerland does most of its export business.

This policy suddenly became more difficult, in part because the European Central bank is expected to announce, on January 22, what economists delicately call “monetary easing”—buying government bonds, lowering interest rates, and giving banks and corporations more access to more euros. The inevitable result would be a lower euro compared to other currencies. Every time the Swiss Central Bank buys euros and sells francs, it is putting money in the pockets of global currency traders and a variety of hot money speculators who have bet that the Swiss will continue their policy. These traders would have reaped a huge windfall if the euro dropped and the bank continued to fight an increasingly expensive battle to maintain parity. The effect would have been a transfer of billions of dollars from Swiss taxpayers to shady speculators.

But why does any of this affect the value of U.S. stocks, or stocks in Europe, for that matter? Why were floor traders on the New York Stock Exchange experiencing what one described as ‘once-in-a-career’ market turbulence, and others described as a ‘massive flight to safety?’ Certain exporting companies in Switzerland will be negatively affected and have to adjust their profit margins downward to stay competitive. But U.S. companies aren’t selling their goods and services abroad in Swiss francs, and European companies will be slightly more competitive, globally, after the expected monetary easing announcement.

The only answer that makes any sense is that hot money traders dislike any kind of surprises, and they hit the “sell” button whenever they’re startled by news that they didn’t anticipate. Then they wait until they have a better understanding of what’s going on. And, since these short-term traders make up a majority of all the actual buys and sells, the markets trade lower even though no fundamental economic reason exists for them to.

This provides a great opportunity for all of us to see the difference between short-term headline moves in the market and long-term fundamental shifts. Make a note, a month from now, to see if you still remember the fact that the Swiss central bank is no longer supporting the franc against the euro. At the same time, look to see if any major shift has occurred in the business operations or profitability of U.S. companies due to this adjustment in currency values overseas. 

There will be consequences. Over the coming months, you might have to pay a little more for a Swiss watch; and chocolate manufactured in Switzerland might be pricier as well. You will want to steer clear of parking your money in the Swiss central banking system, which is now paying an interest rate of negative three quarters of a percent. If you’re a global options trader who took the wrong side of the bet, this was terrible news for your returns this year. But the underlying value of the stocks in a diversified investment portfolio aren’t likely to become less valuable based on the latest trading price of options denominated in Swiss francs.

This is just another news item to consider on our investment journey.

Stay warm!

Sincerely,

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA 

Edward J. Kohlhepp, Jr., CFP®, MBA

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives

 

 

 

Sources: http://www.forbes.com/sites/marcelmichelson/2015/01/16/swiss-franc-u-turn-is-realistic-move-as-snb-cannot-stop-tide/

http://www.businessweek.com/news/2015-01-15/swiss-franc-surges-to-record-high-against-euro-as-snb-ends-cap

 

 

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What's Fueling the Drop in Oil Prices?

 

How long will it last? Who wins & loses from it?

January 2015 

 

On the New York Mercantile Exchange, a barrel of light sweet crude is currently worth well under $50. Prices have dropped more than 25% in a month and almost 50% year-over-year. What is behind this freefall? How long will prices keep dropping, and who does this development hurt and benefit?1

   

Oil prices haven’t cratered simply because of lessening demand. Make no mistake, waning demand is a major factor – and in its latest 2015 forecast, the International Energy Agency projected global demand for crude weakening further. But this is just part of the story.2

 

Saudi Arabia has made a punitive political move. It is the big player among OPEC nations, and it sees no point in thinning the crude supply glut. The longer it lasts, the more pressure it can put on two of its biggest competitors – Iran and Russia.3

 

Saudi Arabia has long feared Iran’s potential to develop nuclear weaponry, and if there’s too much oil on the market, the economy of Iran – which is extremely dependent on oil – could very well tank. Iran’s currency reserves are diminishing to the point where it needs oil prices up at the $130-140 level to balance its budget. Saudi Arabia has about 10 times Iran’s currency reserves, so it is much more equipped to ride out this oil bear market. Given enough economic pressure, Iran could finally make a deal with the world’s superpowers to wind down its nuclear program and signal to the Saudis that “enough is enough.” Russian president Vladimir Putin just told reporters that such a deal was “very close.”3,4

 

Speaking of Vladimir Putin, Russia has long supported the governments of both Iran and Syria – to much bad publicity, and now to its economic peril. Like Iran, Russia is a major oil supplier. It needs oil prices above $100 for any kind of economic stability, which it certainly lacks at present. No one has faith in the ruble, which has sunk against other currencies – and in response, Russia’s central bank just hiked its key interest rate by 6.5% to try and rescue it.5,6

 

Iraq and ISIS – the first making money from oil legitimately, the second illegitimately – are also punished by OPEC’s decision to sustain supply.

 

How will other emerging-market economies handle this tactic? Some might fare better than others. It might exacerbate the appalling economic conditions in Venezuela; it might foster additional unrest in Nigeria, where oil contributes to a third of GDP. Brazil and Mexico aren’t as reliant on oil as they once were; their economies might be able to weather the price drop in the short term, but not if the downturn in prices becomes a “new normal.”6

 

An oil glut could even give the economies of China and India an indirect lift. How? China imports massive amounts of oil and has very little oil and gas reserves – so inexpensive crude is a real gift. China spends about $500 billion a year on oil and gas imports, and it could actually end up halving that cost thanks to the plentiful global oil inventory. That could give its powerful economic engine a tune-up. India, too, is a major oil importer. About 75% of the oil it uses comes from overseas. Sustained cheap oil might soon improve its growth as well.6

 

What would this do for America? Well, cheap oil can translate to cheaper consumer and producer prices, i.e., lower inflation and more money in household wallets. While energy shares took severe hits this month, in the big picture this may bode well for consumer spending, manufacturing and the service industry.1

 

Could we actually see $50 or $60 oil for a year or more? Maybe. In fact, some oil industry analysts think West Texas Intermediate crude prices stay below $50 for awhile. World oil supply is still increasing, and inventory should continue to swell with no sudden pickup in demand being forecast.7

 

While $50 oil sounds cheap, you could argue that it really isn’t. In inflation-adjusted terms, the average price of WTI crude since 1985 works out to slightly above $40 per barrel. Still, inventory will decrease at some point. Analysts at the energy-focused investment bank Tudor, Pickering & Holt recently predicted that “the current oil price is going to crunch supply by late 2015/2016” and OPEC may change its stance if Saudi Arabia gets what it wants in the next few months.8 

Stay warm!

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA
 
Edward J. Kohlhepp, Jr., CFP®, MBA

p://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives   

 

 Citations
1 - markets.on.nytimes.com/research/markets/commodities/commodities.asp [12/18/14]
2 - proactiveinvestors.com/companies/news/58785/dow-drops-over-300-pts-to-end-worst-week-in-3-years-58785.html [12/12/14]
3 - business.financialpost.com/2014/11/13/lawrence-solomon-saudi-arabias-war-of-attrition/ [11/13/14]
4 - reuters.com/article/2014/12/18/us-iran-nuclear-putin-idUSKBNOJW1BM20141218 [12/18/14]
5 - Bloomberg.com/news/print/2014-12-15/Russia-increases-key-interest-rate-to-17-to-stem-ruble-decline.html [12/15/14]
6 - nypost.com/2014/12/14/Saudi-arabias-oil-war-against-iran-and-Russia-2/ [12/14/14]
7 - tinyurl.com/qxjlt25 [12/17/14]
8 - forbes.com/sites/christopherhelman/2014/12/01/after-a-bloodbatch-in-oil-what-next/ [12/1/14]
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Election Returns

 

November 2014

 Now that the midterm elections are safely behind us, a lot of people are wondering how politics will impact their investment returns. The conventional wisdom is that divided government--where one party holds the White House while the other controls the House, the Senate or both--is good for the markets. But is that true?

 The truth is, there is no magic formula. The specific circumstances of each era, and the actions taken by each President and Congress, are much too individual and different for us to generalize. But the statistics are interesting nonetheless. Perhaps most interesting of all, the markets seem to like midterm elections regardless of who wins. The S&P 500 has gained in every six-month period following the last 16 midterm elections, with a remarkable average return of 16%. Going back a little further, from 1922 to 2006, the Dow Jones Industrial Average has jumped 8.5% in the 90 trading days following the midterms, versus just 3.6% in non-midterm-election years.

 If you look at divided government vs. times when one party controlled both the White House and Congress, the results are a bit harder to interpret. The average annual total return for the S&P 500 when Washington is a one-party town has been 9.4%, compared with 10.6% when the parties were checking and balancing each other. However, another study going back to 1900 found that during times of total unity (67 of the 111 years analyzed), the Dow gained 7.6% a year. When Washington is locked in partial gridlock, in other words, where one party controlled Congress and the other the White House, (32 years in all), the index gained 6.8%. And during the 12 years of a gridlocked Congress, the S&P gained just 2% per year.

 Since 1945, the pattern holds. Under total unity, stocks climbed at a 10.7% annual pace. Under partial gridlock, they gained 7.6% per year. And under total gridlock, which accounts for eight of the 65 years, they gained just 3.5% per year.

 This gloomy news might be offset by another trend, however. Since 1900, the third year of a US presidency has been easily the best year for markets, with investors enjoying median annual gains of 16.5%.

 There’s one other statistic to note, which might trump them all. It appears that the Standard & Poor's 500 Index performs two or three times better when Congress is out of session than when at least one of the two chambers is at work. A famous quote from an 1866 New York court decision, that “No one’s life, liberty or property are safe while the legislature is in session,” would seem to have some truth for the equity markets.

 It will be interesting to see what this two year period brings!

 Sincerely,

 Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives

 

 

 

Sources: BobVeres.com         

 http://www.irishtimes.com/business/personal-finance/us-elections-entwined-with-stock-market-fortunes-1.1986324?page=1

http://www.ocregister.com/articles/singer-17484-percent-washington.html

http://www.slate.com/articles/business/moneybox/2010/11/election_day_prediction_buy.html[1]


 

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Bond King®s Messy Exit 2

 

 

September 30, 2014

 

Financial advisors and the investment community were shocked this past Friday when Bill Gross, sometimes referred to as “the bond king” resigned from Pimco, a firm he founded in 1971 that rose to become one of the largest mutual fund management firms in the world. Gross also served as fund manager for the $221.6 billion Pimco Total Return fund, and made frequent television appearances.

 

Although the move was surprising, it was not hard to find reasons for the departure. The Total Return Fund had seen investor redemptions totaling $68 billion in the past 16 months, and more recently, Gross has been under investigation by the Securities and Exchange Commission on a charge that an exchange-traded fund he was managing had illegally inflated its performance numbers. Prior to that, Gross publicly feuded with the man regarded as his successor, Mohammed El Erian, who had become a public face of Pimco with his book outlining a “New Normal” in the investment landscape.

 

Gross has taken a new position at Janus Capital Group, where he will manage a new fund called Janus Global Unconstrained Bond Fund in a new Janus office to be opened near his home in Newport Beach, CA. Some have speculated that investors will pull more money out of the Total Return Fund and follow Gross over to the new fund.  There Gross will have the total control that he sought, and was denied, in his later years at Pimco. 

 

Meanwhile, Pimco seems to be in good hands, with Gross succeeded by Daniel J. Ivascyn, formerly deputy chief investment officer. The Total Return Fund will be managed by longtime Gross associates Mark Kiesel, Scott Mather and Mihir Worah.

 

What are we to make of all this? Today’s mutual funds are typically managed under a team approach. Gross was a throwback to an era when one manager would call all the shots and be rewarded (or not) according to whether his performance exceeded the market. Over time, it became obvious that he was impatient with consensus decision-making, which simply means he was out of step with modern fund management styles. It will be interesting to see if he is able to reproduce his (generally excellent) long-term track record in a more competitive market, particularly during this time period when the bond market has been dependent on Federal Reserve stimulus, which is winding down going into next year. Many advisors benefited from Gross’s investment talents, but some are also undoubtedly happy to see Pimco Total Return managed in a more collaborative atmosphere.

 

We will watch this closely to see if this warrants any changes to your portfolio.

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives

 

 

 

Sources:   

www.bobveres.com Inside Information

http://www.investmentnews.com/article/20140926/FREE/140929923/little-known-insider-ivascyn-takes-investment-helm-at-challenged?utm_source=BreakingNews-20140926&utm_medium=in-newsletter&utm_campaign=investmentnews&utm_term=text

 http://dealbook.nytimes.com/2014/09/26/william-gross-leaves-pimco-to-join-janus/?_php=true&_type=blogs&_r=0

 

 

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Bond King's Messy Exit

 

 

September 30, 2014

 

Financial advisors and the investment community were shocked this past Friday when Bill Gross, sometimes referred to as “the bond king” resigned from Pimco, a firm he founded in 1971 that rose to become one of the largest mutual fund management firms in the world. Gross also served as fund manager for the $221.6 billion Pimco Total Return fund, and made frequent television appearances.

 

Although the move was surprising, it was not hard to find reasons for the departure. The Total Return Fund had seen investor redemptions totaling $68 billion in the past 16 months, and more recently, Gross has been under investigation by the Securities and Exchange Commission on a charge that an exchange-traded fund he was managing had illegally inflated its performance numbers. Prior to that, Gross publicly feuded with the man regarded as his successor, Mohammed El Erian, who had become a public face of Pimco with his book outlining a “New Normal” in the investment landscape.

 

Gross has taken a new position at Janus Capital Group, where he will manage a new fund called Janus Global Unconstrained Bond Fund in a new Janus office to be opened near his home in Newport Beach, CA. Some have speculated that investors will pull more money out of the Total Return Fund and follow Gross over to the new fund.  There Gross will have the total control that he sought, and was denied, in his later years at Pimco. 

 

Meanwhile, Pimco seems to be in good hands, with Gross succeeded by Daniel J. Ivascyn, formerly deputy chief investment officer. The Total Return Fund will be managed by longtime Gross associates Mark Kiesel, Scott Mather and Mihir Worah.

 

What are we to make of all this? Today’s mutual funds are typically managed under a team approach. Gross was a throwback to an era when one manager would call all the shots and be rewarded (or not) according to whether his performance exceeded the market. Over time, it became obvious that he was impatient with consensus decision-making, which simply means he was out of step with modern fund management styles. It will be interesting to see if he is able to reproduce his (generally excellent) long-term track record in a more competitive market, particularly during this time period when the bond market has been dependent on Federal Reserve stimulus, which is winding down going into next year. Many advisors benefited from Gross’s investment talents, but some are also undoubtedly happy to see Pimco Total Return managed in a more collaborative atmosphere.

 

We will watch this closely to see if this warrants any changes to your portfolio.

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives

 

 

 

Sources:   

www.bobveres.com Inside Information

http://www.investmentnews.com/article/20140926/FREE/140929923/little-known-insider-ivascyn-takes-investment-helm-at-challenged?utm_source=BreakingNews-20140926&utm_medium=in-newsletter&utm_campaign=investmentnews&utm_term=text

 http://dealbook.nytimes.com/2014/09/26/william-gross-leaves-pimco-to-join-janus/?_php=true&_type=blogs&_r=0

 

 

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The Newest Largest IPO in History

 

 

September 26, 2014

 

Last fall it was Twitter. Before that, it was Facebook. Now it’s Alibaba, the huge Chinese e-commerce company that just became the largest tech IPO in history, after raising $21.8 billion in its initial public offering on September 18.

 

As it turns out, Facebook and Twitter turned out to be decent investments at their IPO price. Post-IPO buyers purchased Twitter shares at roughly $45 a share, and over the nearly 12 months since, the stock has climbed to around $50--an 11% return that is below what the market as a whole has delivered, but above the negative returns most investors experience in the first year after a public offering. Facebook has done better, starting life at $38 a share in May of 2012, following a very bumpy path that saw investors deeply under water for months, and then recovering so that shares are now trading around $75. 

 

Will Alibaba continue the streak? Amid all the hype, one voice to listen to is veteran emerging markets analyst/manager Mark Mobius, of Franklin Templeton Investments. Mobius acknowledges that Alibaba has some interesting fundamentals--including a return on equity of 24%, operating margins of 26% and revenue of $1.02 billion, making it by far the biggest e-commerce engine in China.

 

But he also notes that the company has an unusual corporate structure that could lead to problems for investors down the road. He warns that the company’s ownership team controls the board of directors, which means that if shareholders are concerned about the direction of the company, or if the owners decide to loot the assets and put the money in their own pockets, well, there isn’t much shareholders could do about it. 

 

What, exactly, did investors buy in this IPO? In most cases, IPO investors are purchasing direct ownership shares of the company. But Alibaba is listed as a variable interest entity, which creates a somewhat more complicated ownership structure. The bottom line is that shareholders, in this public offering, are actually buying a stake in a company registered in the Cayman Islands, which has a contract to share in Alibaba’s profits. If shareholders ever became concerned about Alibaba’s management decisions, they would have to go to a Chinese court to get redress.  It is hard to imagine a positive outcome for American investors.

 

Along this line, it is interesting to note that the original plan was for Alibaba to go public on the Hong Kong stock exchange, but the Hong Kong regulators declined to allow it, citing concerns about (you guessed it!) the ownership structure and fairness to Hong Kong investors. The New York Stock Exchange may have been more focused on a big payday than on consumer protection when it allowed the company to list in the U.S.

 

On September 19th, Alibaba (BABA) officially started trading on the NYSE. The initial IPO price was set at $68 but due to the high demand the price jumped to the $92-$93 range. It took a little over two hours of preparing the market maker’s computer trading networks until the first trade was executed to $92.70. The first couple minutes of trading was very volatile but the price ending up settling around $93 and the next few trading days saw a modest pull back into the upper 80’s.  

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives

 

 

 

 

These are the opinions of Kohlhepp Investment Advisors, Ltd. and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. No reference to any specific company constitutes a recommendation to buy, sell or hold a specific security or any other investment or any other course of action to be taken as to any.

investment. Sources: http://money.cnn.com/2014/09/17/investing/mark-mobius-alibaba-ipo/index.html?iid=SF_INV_River

http://www.marketwatch.com/story/alibabas-structure-is-dangerous-mark-mobius-2014-09-18

http://www.macroaxis.com/invest/market/1688.HK--fundamentals--Alibabacom_Limited

 www.bobveres.comInside Information

 

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617 Hits

Secession Out of the Bottle?

 

 

September 24, 2014
 

 

Scotland has voted--for now--to remain a part of the United Kingdom, a move which avoids such huge and thorny decisions as: how much of Britain’s national debt would belong to the newly-independent Scottish nation? Would Scotland have to create its own army and navy, or enter into a contract with the UK for mutual defense? What currency would Scottish citizens use--the euro, the pound or some new currency that hasn’t been created yet? Would other countries have to set up embassies in the new nation, and would the country have to create its own embassies around the world? And the most interesting question of all: if Scotland leaves the UK, would Ireland follow? And Wales? And Cornwall?
 

 

The vote has put the spotlight on a lot of other separatist initiatives around the world. Prominent among these are the French-speaking citizens of Quebec in Canada, the citizens of Spain’s Catalonia (who speak a different language, and whose capitol would be Barcelona), Uighurs and Tibetans in China, the Flemish in Belgium, the Istrian Italians in Croatia, the Moravians in the Czech Republic (which is itself a breakaway part of the former Czechoslovakia), the Savoyans in France, the Bavarians and Frisians in Germany, the Punjabi, Tamils and Manipuri in India, the South Moluccans in Indonesia, the Sardinians and Venetians in Italy, the Sami and Kven in Norway, the Kurds and Armenians in Turkey, Upper Silesians in Poland, and at least twenty different ethnic regions of Russia, famously including the Chechnyans. Myanmar/Burma has 12 ongoing separatist movements. The war in the Ukraine, a long-term history of violence in Northern Ireland, the Chechnyan terrorist attacks and the rise of an Islamic state in Syria and Iraq illustrate some of the trauma associated with separatist efforts.
 

 

Nor is the concept totally foreign to the U.S. Texas Governor Rick Perry started his own separatist movement by publicly talked about the possibility that his state could exit the U.S., and a Texas secession petition garnered 125,000 signatures in 2012. Its backers hope to make Texas what it was for ten years in the 1800s--a sovereign nation.

   

 

In case you were wondering, the Scottish nation would have been the world’s 42nd largest, behind Finland and ahead of Israel, and secession would have knocked the UK’s GDP down a rung from 6th to 7th in the world, behind Brazil. An independent Quebec’s GDP would rank 33rd among the world’s nations, behind Colombia, comfortably ahead of Denmark. The sovereign nation of Texas would instantly become the world’s 12th largest economy, larger than Mexico or Spain. The state’s 27 million people would qualify Texas as the world’s 44th most populous, behind Venezuela and ahead of Ghana.
 

 

Constitutional experts note that, unlike Quebec and Scotland, Texas doesn’t actually have the right to vote itself out of its national affiliation. Polls show that 80% of Texas voters prefer to remain American, just as Scottish voters have preferred to remain English and, so far, the Quebecois and Catalonians have voted to stay in their respective countries. But as these votes become increasingly common, it’s possible that the world is entering a new era where secession initiatives are becoming more thinkable. Thirty or fifty years from now, the global map--and perhaps the American one as well--might look very different than it does today.
 

 

Happy Fall!
 

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives


 

Sources:

www.bobveres.com Inside Information

http://www.dailysabah.com/opinion/2014/09/17/the-consequences-of-scottish-dependence

http://en.wikipedia.org/wiki/List_of_active_separatist_movements_in_Europe

http://www.huffingtonpost.com/2013/11/05/texas-secede_n_4213506.html

http://theweek.com/article/index/236871/what-would-happen-if-texas-actually-seceded

http://www.star-telegram.com/2013/03/24/4724519/what-if-texas-really-did-secede.html

http://en.wikipedia.org/wiki/List_of_active_separatist_movements_in_Asia

 

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Pension Questions After the Detroit Bankruptcy

 

How many retirees face the possibility of less recurring income?

 

September 2014

 

On July 18, Detroit became the largest American city to file for Chapter 9 bankruptcy. What will happen to the pensions of its 20,000+ retired public employees? There is a possibility they could be reduced – perhaps greatly. In the wake of Detroit’s fiscal problems, current and future pension recipients across the country are wondering about the stability and amount of their promised incomes.1,2  

In Michigan, the fate of the pension checks for these employees may be determined in the courts. While a federal judge is overseeing Detroit’s bankruptcy proceedings, Michigan’s state constitution states that pension benefits can’t be altered. On July 24, the aforementioned federal judge froze assorted state-court lawsuits brought against the city arguing that the bankruptcy filing was unconstitutional (at the state level). As much as Detroit might want to scale back pensions for fiscal relief, it may be prohibited from doing so.1 

When pensions shrink after municipal bankruptcies, how bad is it? For a sobering example, look at Central Falls, RI, which filed for bankruptcy in 2011. Following that declaration, the city whittled away more than 50% of the pension checks issued to a third of its retirees. For example, the average retired firefighter’s annual pension income went from $68,414 to $30,786.2  

That’s certainly drastic, and it may not be replicated in Detroit or in Stockton, CA (the second largest American city to go bankrupt). Stockton is reducing bond payments, but so far has refrained from slashing pensions. (As it happens, the city’s biggest creditor is CalPERS, the California Public Employees’ Retirement System.) California’s state constitution also bars reductions in pension benefits, so Stockton’s retired public employees may be waiting on the courts as well.1 

Municipal pensions aren’t the only ones at risk. Polaroid went bankrupt, and as a consequence, its retirees are receiving pension checks courtesy of the federal Pension Benefit Guaranty Corp. (PBGC) – checks that, as MarketWatch columnist Robert Powell recently noted, represent “a fraction of what they were supposed to receive.” The biggest multiemployer pension fund in America is that of the Teamsters (the Teamsters’ Central States, Southeast & Southwest Pension Plan). When 2012 ended, it held $17.8 billion in assets. Its liabilities were at $34.9 billion.2 

The worst-case scenario is worth considering – just in case. If you receive a pension or are in line for one, developments like these may give you pause. It might be time to ask “what if” – what options you might have if your pension shrinks.  

Suppose your pension income was cut 20-30%. What choices would you make? Would you try to live on less, and maybe move to a region where living expenses might be lower? Would you explore becoming a consultant or a solopreneur, or look into part-time work? Could you find methods to generate passive income, or make financial moves to replace any recurring income that would be lost?        

For those of you currently receiving or accruing a pension there is no cause for alarm. If you have any questions, please give us a call.

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives  

 

 

 

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. 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 - nation.time.com/2013/07/25/the-wages-of-bankruptcy-stocktons-cautionary-tale-for-detroit/ [7/25/13]

2 - marketwatch.com/story/will-your-pension-disappear-post-detroit-2013-07-24 [7/24/13]

 

 

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661 Hits

How LTC Insurance Can Help Protect Your Assets

 

Create a pool of healthcare dollars that will grow in any market.

 

August, 2014

 

How will you pay for long term care? The sad fact is that most people don’t know the answer to that question. But a solution is available.

 

As baby boomers leave their careers behind, long term care insurance will become very important in their financial strategies. The reasons to get an LTC policy after age 50 are very compelling.

 

Your premium payments buy you access to a large pool of money which can be used to pay for long term care costs. By paying for LTC out of that pool of money, you can preserve your retirement savings and income.

 

The cost of assisted living or nursing home care alone could motivate you to pay the premiums. Genworth Financial conducts a respected annual Cost of Care Survey to gauge the price of long term care in the U.S. Here is a summary of the 2013 survey’s key findings:

 

*In 2013, the median annual cost of a private room in a nursing home was $83,950 or $230 per day – up 3.6% from 2012. In the past five years, the cost has risen about 4.5% annually.

*A private one-bedroom unit in an assisted living facility has a median cost of $3,450 a month, or $41,400 annually. It was 4.5% cheaper last year.

*The median payment to a non-Medicare certified, state-licensed home health aide is $19 an hour in 2013, up 2.3% from 2012.1

 

Can you imagine spending an extra $40-85K out of your retirement savings in a year? What if you had to do it for more than one year?

 

The U.S. Department of Health & Human Services estimates that about 70% of Americans will need some kind of long term care during their lifetimes. Additionally, 69% of Americans older than 90 have some form of disability – often a direct cause for long term care.2

 

Why procrastinate? The earlier you opt for LTC coverage, the cheaper the premiums. This is why many people purchase it before they retire. Those in poor health or over the age of 80 are frequently ineligible for coverage.

 

What does it pay for? Some people think LTC coverage just pays for nursing home care. That’s inaccurate. It can pay for a wide variety of nursing, social, and rehabilitative services at home and away from home, for people with a chronic illness or disability or people who just need assistance bathing, eating or dressing.3

 

How much will your DBA be? DBA stands for Daily Benefit Amount - the maximum amount that your LTC plan will pay per day for care in a nursing home facility. You can choose a Daily Benefit Amount when you pay for your LTC coverage, and you can also choose the length of time that you may receive the full DBA on a daily basis. The DBA typically ranges from a few dozen dollars to hundreds of dollars. A small number of these plans offer you “inflation protection” at enrollment, meaning that every few years, you will have the chance to buy additional coverage and get compounding - so your pool of money can grow.

 

Medicare is not long term care insurance. Some people think Medicare will pick up the cost of long term care. That is a misconception. Medicare will only pay for the first 100 days of nursing home care, and only if 1) you are getting skilled care and 2) you go into the nursing home right after a hospital stay of at least 3 days. Medicare also covers limited home visits for skilled care, and some hospice services for the terminally ill. That’s all.4

 

Now, Medicaid can actually pay for long term care – if you are destitute. Are you willing to wait until you are broke for a way to fund long term care? Of course not. LTC insurance provides a way to do it.4

 

Why not look into this? You may have heard that LTC insurance is expensive compared with some other forms of coverage. But the annual premiums – in the vicinity of $2,000-2,500 for the typical policy right now – are cheap compared to real-world LTC costs.3

 

Ask an insurance or financial professional about some of the LTC choices you can explore. While many Americans have life, health and disability insurance, that’s not the same thing as long term care coverage.

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives

 

 

 

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. 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.

 

 

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693 Hits

Making Sense of Employment Statistics

 

 

 

July 29. 2014

 

We are deluged with numbers like how many jobs were created this month and last month, or the ever-fluctuating number of jobless claims, or number of people who may or may not have stopped looking for work. The most recent Bureau of Labor Statistics report says that U.S. employers had 4.635 million job openings in May, which is up from 4.464 million in April. The Labor Department recently released its latest reporting, telling us that non-farm employers hired a “seasonally-adjusted” 288,000 workers in June, and we are told that the unemployment rate now stands at 6.1%.

 

But what does that tell people who are actually looking for work? What does that tell us about the real economy? Is there a better way to make sense of today’s job picture?

 

The accompanying chart puts the current and historical U.S. labor situation into much clearer perspective. It shows the number of unemployed persons per job opening as of last week, and the same number going back to 2001. Back before the “tech wreck” bubble burst, there was approximately one job seeker per job opening. That doesn’t mean that everybody was trained or suitable for every job, but it does indicate that finding work was probably not impossible for able-bodied and skilled individuals.
 

During the Great Recession, that number jumped up to an average of roughly 7 job seekers for every opening. Today, after a long, slightly choppy improvement in the prospects of workers, there are 2.11 unemployed workers for every job opening, and the trend is the friend of the unemployed.

 

This chart shows, perhaps more clearly than other indicators, an improving economy and tightening labor markets, which usually signals more competitive pay packages as companies start doing something they haven’t been doing for years: actually competing for qualified workers. That, in turn, could cause the Federal Reserve Board--which watches unemployment numbers closely as it sets rates--to raise interest rates sooner than expected. It may also raise the cost of doing business for companies throughout the economy, raising the inflation rate as those extra employment costs are passed on to consumers.

 

In addition, as economist David E. Kelley has pointed out, more jobs at the tail end of a market expansion can add an unexpected boost to GDP growth by raising corporate capital spending. In a presentation in San Francisco, he recently said that when companies lay off people, and then eventually start hiring back to previous staffing levels, they really don’t need to buy anything new. They can give their new employees the cubicle, computer and desk of the fired workers.

 

But once they’ve replaced the jobs lost, the next hire needs new equipment. “What we’re seeing now is that the economy is going to need capital spending to go with the improvement in employment,” Kelley told the group, “and we are starting to see that in capital goods orders.”

 

For investors, higher inflation, higher interest rates, but more unemployment and higher GDP, is kind of a mixed bag. But at least the jobs situation can be better understood with this new chart, and more jobs and higher salaries are ultimately better for the American people as a whole.

 

Sincerely,

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives

 

 

Source: http://www.businessinsider.com/21-unemployed-americans-per-job-opening-2014-7

www.bobveres.com

 


 

 

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669 Hits

Don't Fear the Correction (A Different Perspective)

 

July 22, 2014

 

At of the end of June, the Standard & Poors 500 index has completed 32 full months without a correction of 10% or more. We are living in a remarkably long bull market; the average time span without a full-blown correction is just 18 months. Since the last correction in September of 2011, the S&P 500 has gained 75%, threatening the remarkable 100% advance that began in March of 2003 and lasted until the market peaked in October of 2007.

 

Today, as the S&P moves near the 2,000 level, as the small cap Russell 2000 and the Nasdaq index both reach record highs, it may be a good time to prepare for that inevitable correction down the road. It may take the market down 10% or, worse, reach the technical definition of a full market correction, which is a downward move of 20% or more.

 

Prepare how? First, it helps to recognize that every market has pullbacks, and that these are a normal part of stock market behavior. Since the Great Recession lows in March 2009, the S&P index has experienced nine different corrections, ranging in magnitude from 6% to more than 21%.

 

Second, it helps to recognize that these pullbacks are almost totally unpredictable. Knowing there will be a pullback doesn’t tell us when or help us maximize returns. If we take money out of the market today, on the certainty that a pullback is coming, we are just as likely to miss another year or two of upward movements as we are of sidestepping an immediate downturn. Nor do we know how long the downturn will last. Add in trading costs and taxes, and the decision to guess when to step out of the market, and back in again, is not likely to add value in the long run.

 

Third, recognize now that the next unpredictable correction will look blindingly obvious in hindsight. It will seem like everybody but you knew in advance what was coming and when. In reality, what you’ll be hearing is reporters quoting the same few people over and over again, people who confidently predicted that a downturn was coming and turned out to be right. Look a bit more deeply than the reporters do, and you’ll find that this small number of people had been predicting that the correction was coming over and over and over again for years.

 

Finally, realize that inaction is actually taking strong and unusual action. People who simply kept their money in stocks during each of the market downturns ended up seeing the indices reach new highs once the correction had run its course. Strong long-term investors benefit from the incremental daily, weekly, monthly efforts of millions of workers who come into the offices, factories and warehouses and build the value of their companies.

 

People will change their opinions about what stocks are worth, but in general, over time, the value of most companies will rise to the extent that those workers add value during their workdays. When people lose faith in that value, as they will when the next correction hits, it will put stocks on sale and give the rest of us an opportunity to buy in at lower prices--if we have the courage to separate ourselves from the herd.

 

As you know we offer strategies which attempt to reduce your downside exposure. If you would like to review this in more detail, please contact our office.

 

Enjoy this nice weather!

 

Sincerely,

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives

 

 

Source: http://www.bloombergview.com/articles/2014-07-07/a-correction-is-coming

 

 

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688 Hits

The Troubling National Debt

 

It is projected to grow even larger. What does that imply for the economy?

 

July 2, 2014

In 1835, something financially remarkable happened: the federal government paid off the national debt.1

 

It hasn’t happened since. Through myriad presidential administrations and economic cycles, the national debt has persisted. Wars, depressions and recessions have all helped send it higher, and while it can shrink in the short term, it isn’t going away. Currently it stands at $17.6 trillion, with $12.6 trillion of it held by the public.2

 

The big picture is disconcerting. In fall 2013, the non-partisan Congressional Budget Office said that the national debt amounted to 73% of U.S. GDP. The CBO sees it declining to 68% of GDP by 2018, but then increasing to 71% by 2023 as a consequence of rising interest rates and spending boosts for Social Security and health care. CBO projections have the country’s debt equaling 100% of its annualized growth by 2038 – a milestone best not reached or approached.3

If the national debt should grow over the next decade, what would the impact be? It would be felt subtly, but it would be notable.

 

The greater the U.S. debt-per-capita, the greater the default risk for the federal government – meaning that newly issued Treasuries would need to have higher yields to appeal to investors. A bigger percentage of federal tax revenue would go toward paying the interest on the national debt, leaving fewer tax dollars for federal services and programs. Consequently, borrowing for economic enhancement projects would become harder, with a reduced standard of living for American households as a possible byproduct.4

 

Higher Treasury yields have three distinct implications. They can lessen appetite for risk; if the yields on Treasuries start to look pretty good compared to the returns on equities or corporate securities, investors may run to the “risk-free” Treasuries. Indirectly, this could encourage more inflation: higher Treasury yields could prompt yields on corporate securities to rise, which would force those corporations to hike prices on goods and services, i.e., inflation. Lastly, mortgages would become costlier as their interest rates are linked to Treasury yields and the short-term interest rates established by the Federal Reserve. Costlier mortgages imply fewer homebuyers, which in turn leads to lower home prices and reduced net worth for homeowners.4

 

Under current projections, what might happen by 2038? If America reaches to a point where its debt does roughly equal its GDP, a considerable economic price could be paid. In addition to a loss of confidence on the part of foreign investors, you would have a loss of flexibility on the part of the federal government.

 

Other nations might lose faith in our ability to pay our debt obligations. If that happens, we would find it harder or more expensive to borrow money. More and more federal borrowing could discourage private investment (although incomes and inflation-adjusted output could still rise). If the federal government needed to spend ever-increasing amounts of money to pay down the interest on the nation’s debt, shifts in fiscal policy and significant tax law changes would no doubt occur. The greater the percentage of federal spending given over to the national debt, the less capable the federal government would be to respond to an economic, geopolitical or environmental crisis.

The CBO’s forecast has sounded an alarm, and some view the national debt crisis as an emerging national security issue.

 

We incur some debt to foster economic expansion. Take the recent federal stimulus programs, for example. Taking on debt of that kind can be worthwhile as a step toward economic recovery. It is the other kind of debt – debt in response to today’s consumption – that risks handing future generations dilemmas.

 

While an ever-increasing national debt is a problem, a manageable national debt we can live with. We can’t turn back the clock to 1835. Andrew Jackson’s early struggles with debt as a land speculator led to his dream of a debt-free America with a federal government that didn’t need any credit. By selling off huge chunks of federal land and vetoing every spending bill that came his way, the seventh President cut the federal deficit from $58 million to $0 in six years. Coincidentally or not, a lengthy depression soon began.1

 

Happy 4th of July!


Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA
 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives

 

 

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 - npr.org/blogs/money/2011/04/15/135423586/when-the-u-s-paid-off-the-entire-national-debt-and-why-it-didnt-last [4/15/11]

2 - treasurydirect.gov/NP/debt/current [6/19/14]

3 - cbo.gov/publication/44521 [9/17/13]

4 - investopedia.com/articles/economics/10/national-debt.asp [10/11/13]


 

 

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THE WORRY LIST

 

May 16, 2014

 

So far this year, the investment markets have held up pretty well, which doesn't always happen after a year of big returns like we experienced in 2013. But based on experience, you know that something will spook investors at some point this year, the way the markets took a dive when Congress decided to choke off the U.S. federal budget, or when investors realized that Greece had somehow managed to borrow ten times more than it could possibly pay back to its bondholders.

 

Professional investors have learned to create a mental "watch list" of possible market-shaking events, and they were helped recently when Noriel Roubini, chairman of Roubini Global Economics, former Senior Economist for International Affairs at the U.S. Council of Economic Advisors, compiled his own worry list. Roubini said that we're past the time when people should be fearful of a breakup of the Eurozone, or (for now) any Congressional tinkering with the debt ceiling. The public debt crisis in Japan seems to be fading in the optimism of Japanese Prime Minister Shinzo Abe's monetary easing and fiscal expansion, and the war between Israel and Iran over Iranian nuclear technology, once thought to be imminent, now appears to be on the back burner.

 

So what does today's worry list look like? Roubini starts off with China, which is trying to shift its growth away from exports toward private consumption. Chinese leaders, he says, tend to panic whenever China's economic growth slows toward 7% a year, at which time they throw more money at capital investment and infrastructure, creating more bad assets, a lot of industrial capacity that nobody can use, and a bunch of commercial and industrial buildings which sit empty along the skyline. By the end of next year, something will have to be done about the growing debt at the same time that investors face a potential crash in inflated real estate prices. Think: five or six 2008 real estate crises piled on top of each other, all of it happening in one country.

 

Numbers two and three on Roubini's worry list involve the U.S. Federal Reserve, which could (worry #2) cease its massive purchases of real estate mortgages and government bonds too quickly, causing interest rates to rise and sending financial shockwaves around the world. Or, on the other hand (worry #3) the Fed might keep rates low for so long that the U.S. experiences new bubbles in real estate, stocks and credit--and then experiences the consequences when the bubbles burst.

 

Roubini also worries about emerging market nations being able to manage their debt and capital inflows if interest rates go up, and of course the situation in the Ukraine has significant market-spooking potential. Finally, he notes that China has significant unresolved territorial disputes with Japan, Vietnam and the Philippines, which could escalate into military conflict. If the U.S. were drawn into a maritime confrontation, alongside Japan, with Chinese warships, investors might think it's a good time to retreat to the sidelines.

 

None of these scenarios are guaranteed to happen, and some of them seem unlikely. But these periodic, headline-related spookings come with the investment territory. If and when one of these events grabs the global headlines, it might be helpful to remember that the stock markets have weathered worse and come out ahead. Think: World War II, a presidential assassination, two wars in the Middle East, 9/11 and a Wall Street-created global economic meltdown. If we can survive and even profit, long-term, from a stay-the-course investment mentality through those events, then we might be able to weather the next big headline on (or off) the worry list.

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives

 

 

 

Source: http://www.project-syndicate.org/commentary/nouriel-roubini-warns-that-even-as-many-threats-to-the-world-economy-have-receded--new-ones-have-quickly-emerged#TA08zJsftAXboy7Y.99

Bobveres.com

 

 

 

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The Heartbleed Threat

 

How vulnerable are your accounts?

 

April 25, 2014

 

IF YOU USE THE INTERNET, PLEASE PAY ATTENTION TO THIS NEWSLETTER!

 

A plague at the heart of the Internet. Anyone who ventures online should be aware of the risks posed by Heartbleed, the biggest threat to Internet security in at least a couple of years. All Internet users need to respond to its reality.

 

What is it? Heartbleed isn’t a virus, but a software bug – a distressing flaw in web encryption technology, specifically a defect in the widely used Open SSL cryptographic software library.1

 

Heartbleed was recently detected by Google Security researcher Neel Mehta and researchers at Internet security firm Codenomicon. They determined that all versions of OpenSSL released between March 14, 2012 and April 7, 2014 contained the bug. This flaw in RAM is hugely problematic, as popular open-source Web servers like Apache and ngnix use OpenSSL to protect user security.1,2

 

What kind of damage can it do? SSL is the software that gives you the secure connection (https://) on assorted websites. Potentially, the Heartbleed flaw in OpenSSL can let identity thieves snare enormous numbers of username/password combinations from such websites – without a trace.1,3

 

What websites are still vulnerable? The list is changing (and fortunately, decreasing) daily. Head to the respected tech website Mashable.com for a frequently updated “Heartbleed Hit List” (Google “Heartbleed hit list” and you’ll get there in a click).4

 

Some vulnerable websites have promptly patched the Heartbleed defect, and this means that you should be changing your password at those websites, which include Facebook, Pinterest, Google, Yahoo! and others. If you don’t, you are leaving yourself open to identity theft.4

 

Fortunately, very few of the big banking and day trading websites use OpenSSL; none have reported security issues so far. LinkedIn, AOL, PayPal and eBay also report that they are unaffected. The IRS reports no problems with its website.4

 

How can you protect yourself? Head to Mashable.com’s list to see where you must change your password. Change passwords at those websites, and don’t use the same new password for one site at another.

 

Some people like to use password managers such as Dashlane and LastPass – these are software programs that generate random, unique and very strong passwords for websites you visit, and which automatically enter them for you. You will actually never know these passwords; they will be hidden behind a single master password.5 Italian cybersecurity specialist Filippo Valsorda has a tool (filippo.io/Heartbleed/) where you can test a website (specifically, its server) to see if it is suffering from Heartbleed. Type in the website address and hit “go”; if the website is “all good”, it has been patched for Heartbleed, but your password should still be changed anyway as a precaution; if the test finds it “vulnerable,” that means you should refrain from changing a password for the moment and wait for the site to be secured. If you change passwords prior to the site being secured, you may actually be putting yourself at greater risk than you previously were.5,6

 

Be safe, stay alert. While the response to Heartbleed has been necessarily swift, it reminds us that we need to be vigilant and that online security can sometimes be overstated. So change those relevant passwords for sites that have been patched, if you haven’t done so already.

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

 

 

 

 

Citations.

1 - theatlantic.com/technology/archive/2014/04/the-5-things-to-do-about-the-new-heartbleed-bug/360395/ [4/9/14]

2 - tinyurl.com/pt4u4jd [4/8/14]

3 - forbes.com/sites/jameslyne/2014/04/08/heartbeat-heartbleed-bug-breaks-worldwide-internet-security-again-and-yahoo/ [4/8/14]

4 - mashable.com/2014/04/09/heartbleed-bug-websites-affected/ [4/12/14]

5 - slate.com/blogs/future_tense/2014/04/10/password_managers_can_protect_you_from_vulnerabilities_like_heartbleed.html [4/10/14]

6 - latimes.com/business/technology/la-fi-tn-heartbleed-test-check-safe-sites-20140409,0,2218732.story#axzz2ytqRwphB [4/9/14]

 


 

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Flash Boys Takes Aim at Wall Street

 


A new best-seller makes two provocative assertions. But how true are they?

 

April 25, 2014

 

A FURTHER UPDATE!

 

Is Wall Street out of control? Main Street and Wall Street are abuzz over Flash Boys: A Wall Street Revolt, the new book from Berkeley-based journalist Michael Lewis (author of Moneyball and The Blind Side, London School of Economics graduate and former bond salesman).

 

Flash Boys makes a couple of bold conclusions, which the media have had a field day with. One, Wall Street is rigged. Two, the little guy can’t win. To put it less sensationally: high-speed traders have a marked advantage on Wall Street, one that the little day trader (and even the astute money manager) can’t equal.

 

Can the individual investor still win? If you define “winning” in terms of day trading, maybe not; if you’re in the market for the long run, it is still quite possible to grow wealth through equity investing. Millions of Americans have, and in all probability millions more will.

 

To seasoned investors, much of what Flash Boys has to say is hardly revelatory. While the financially semi-literate are hailing the book as a confirmation of all they suspected, the fact is that high-speed trading may have some benefits for investors (which even Lewis concedes).

 

In the last several years, a new Wall Street has emerged. Flash Boys focuses on Brad Katsuyama, who in 2007 was the head of stock trading for the Royal Bank of Canada. In buying and selling shares on various exchanges, Katsuyama began to wonder if he was being left in the dust (and even being manipulated) by cutting-edge high-frequency trading programs. Eighteen months later, he concluded this was true. He campaigned to educate fellow traders and investment managers, asserting that the big American exchanges (NASDAQ, NYSE, BATS, etc.) were set up to benefit a handful of insiders (high-frequency traders, banks and brokerages) at the expense of fund managers and individual investors.1

 

In response, Katsuyama spearheaded the creation of the IEX exchange, which opened in late 2013 and disallowed HFTs their usual speed advantage. The IEX stands as the new model of a Wall Street exchange; the NYSE has been trying to buy it, as pressure has increased for banks and brokerages to conduct more trading there.1,2

 

To the general public, “Wall Street” equals the floor of the NYSE and pictures of Peter Tuchman. (He’s the oft-photographed floor trader who has become sort of an unofficial Wall Street mascot; Google his name and you’ll recognize him.) But as Lewis points out, the beating heart of the stock market is now in northern New Jersey, home to the massive NYSE Euronext data center and other key exchanges. These titans west of the Hudson sell access to their premises to HFTs, and even in this fiber optic era, physical proximity matters. The speediest computers with the fastest connections that are physically closest to the actual exchange computer get price changes an instant before the others and may trade with a competitive advantage.1,3

 

How does it work? An HFT (a proprietary software program) detects another trader about to buy shares at a specific price, and reacts by purchasing those shares a fraction of a second sooner. Milliseconds later, it sells the shares back to the trader that first wanted to buy them at a higher price, for a transaction fee. This amounts to front-running, and unsurprisingly the Securities and Exchange Commission, the Commodity Futures Trading Commission and the FBI are investigating the whole process.4

 

As Lewis notes, HFTs essentially exact a tax on individual investors via all this trading and dumping – probably a penny or less per trade, but still a kind of penalty. The macro problem, he finds, is an erosion of trust in the markets resulting from the ascension of HFT and the flash crashes, interruptions and share price fluctuations that can accompany it.1,4

 

High-frequency trading may have an upside. It is not going away, and some market analysts feel it creates more liquidity and cuts trading costs. Some empirical studies have stated that HFT makes trading cheaper and more efficient. One study (Does Algorithmic Trading Improve Liquidity? by Terrence Hendershott, Charles Jones, and Albert Menkveld) shows that such trading reduces bid-ask spreads by about 50%. Another (High Frequency Trading and End-of-Day Price Dislocation by Douglas Cumming, Feng Zhan, and Michael Aitken) concludes that HFT has reduced distortion in settlement prices across stock exchanges worldwide.5

 

In this new stock market, you can still enjoy old-school success. After reading Flash Boys, you might think that day trading is a fool’s errand. Maybe it is: it is so easy to buy high and sell low, and you are up against algobots that are swift and unemotional. They will be first in line for that hot IPO, and they will be on top of market movers faster than you will.

 

On the other hand, if you want to build wealth, save for retirement, and take advantage of equity investing and compounding, the stock market still provides you with the long-range potential to do just that. That potential is not going away, and you should take advantage of it.

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

 

 

 

 

Citations.

1 - tinyurl.com/kuah7pf

2 - theglobeandmail.com/report-on-business/international-business/canadian-at-centre-of-spat-over-soundness-of-us-markets/article17839483/ [4/4/14]

3 - datacenterknowledge.com/closer-look-nyse-euronexts-nj-data-center/ [4/7/14]

4 - csmonitor.com/Business/2014/0402/Flash-Boys-reignites-debate-Is-high-frequency-trading-a-digital-age-menace [4/2/14]

5 - business.financialpost.com/2014/04/02/high-frequency-trading-michael-lewis/ [4/2/14]


 

 

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The Dangers of Instinctive Investing

 

 

 

April 10, 2014

 

You've probably read about behavioral finance research. The conclusion is generally the same, no matter what aspect of our decision-making is being probed: the human mind is hard-wired to process information in certain ways which were extremely helpful when the environment contained gazelles (very tasty!) and saber-toothed tigers (extremely dangerous!), but are not so helpful when we're navigating the unfamiliar terrain of the investment markets. People shop at the mall looking for bargain prices, rather than flocking to stores where the price tags have been constantly revised upwards for the past 12 months. But for some reason, they do the opposite when they're shopping for investments.

 

The research reports make it sound like ordinary investors are subject to these stupid urges, but professional financial advisors are somehow immune to them. This is far from the truth. Financial planners and advisors are better-trained to understand the markets, but we're all subject to the same primal urges and instincts. Most professional advisors looked back with some regret at the returns the U.S. markets experienced last year, and wished they'd had the foresight to go all-in on stocks on January 1. That, of course, was when Congress was flirting with the fiscal cliff and a potentially-catastrophic repudiation of Treasury debt, 597 U.S. counties in 14 states were receiving disaster relief from the worst drought on record, blizzards were burying the Northeast, people were saying that the Mayan calendar predicted the end of the world and some voters were saying that the Presidential election results confirmed it.

 

Today, as advisors look back with envy, so too do their clients and investors. It is deeply engrained in our nature to wonder whether we should pile into stocks now while the markets are still going up. If the Russian invasion of Crimea can't stop the upward trend, then what else can?

 

These are sometimes the hardest conversations a professional advisor can have, for a couple of reasons. First, because it requires the advisor to admit that we really don't have a clue about what the markets are going to do next. This is true of every living person, of course, but shouldn't professionals have better insight into the future? It feels like we're admitting a dirty secret, when in fact the inability to see the future is a limitation we mortals all share.

 

The second reason this conversation is hard is because it always seems like the advisor is trying to talk people out of what they want to do. We are just past the five-year anniversary of one of the best times in history to have thrown all your money into stocks--in March 2009, right after the massive global economic meltdown, in the teeth of the Great Recession. But of course, most of the conversations at that time revolved around just the opposite decision: shouldn't I take all my money out of the market and avoid any further losses?

 

Instead of encouraging their clients to double-down on stocks in early March 2009, most advisors were still looking back with shock and horror. All of us were feeling our own sense of regret that somehow, some way we should have seen the meltdown coming--even though Fed economists, regulators and global leaders couldn't predict it either.

 

Today, as always, we have no idea where the markets are headed. All we know is that history has shown, over and over again, that when the markets have been on a long upward run, and the run seems to be accelerating, that has traditionally been a poor time to load up on stocks.

 

But it's fair to ask: what could derail stocks this year? Interest rates are low and likely to remain that way as long as the Federal Reserve Board intends them to--which, if we believe their pronouncements, won't be until next year at the earliest. The economy is still in recovery, but GDP gains are now in line with historical averages and trending upward. Household financial obligations (measured by the share of income needed to make payments on mortgages, leases, student loans, credit cards and auto loans) is the smallest share of income since the early 1980s. Oil and gas prices are low and trending downward. We seem, on the surface, to be facing the exact opposite conditions that we experienced at the beginning of 2013: less uncertainty, calmer economic weather.

 

But maybe that's the point. The current circumstances really don't tell us much about future markets movements. Stock prices jump up and down and around based on what analysts call "sentiment," which basically means all those dysfunctional behavioral finance heuristics playing out day by day, week by week, as we hunt stocks the way our ancestors hunted antelope. All we know is that over the long-term, companies in aggregate (and their stocks, in aggregate) have become increasingly valuable, due to the time and energy and ingenuity of all the workers whose daily labor creates, builds and manages this growth. Fortunately, for those who have the discipline to act on it, this information can be enough to build wealth over years of patience, while the people who try to time the markets on the upside and downside are letting this stable long-term wealth opportunity slip through their fingers.

 

Keep in mind that investing is a journey, not a destination. And with any journey, patience is a virtue – and a long term outlook and plan is the one which reaps the most rewards.

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

 

 

Sources:

Bob Veres.com


 

 

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What??! The Stock Market is Rigged???

 

April 4, 2014

 

You may have heard about the 60 Minutes interview on March 30th with author Michael Lewis, a former Wall Street broker, author of "Liar's Poker" and "The Big Short," who has just come out with a new book entitled "Flash Boys." Lewis is an eloquent and astute critic of Wall Street's creative and predatory practices, and in his new book (and in the 60 Minutes interview) he offers evidence that the stock market is "rigged" by a cabal of high-frequency traders, abetted by stock exchanges and Wall Street firms.

 

The charge is entirely true. And it is also completely irrelevant to you and anyone else who practices patient investing.

 

Lewis is exposing a secret advantage that a surprisingly large number of professional traders, employed by large brokerage firms, are able to get when they build high-speed fiber optic cable feeds directly into the computers that match buyers and sellers of securities. Some of those traders actually have their trading computers located in the same room as the New York Stock Exchange and Nasdaq servers. And some pay extra for access to more information on who wants to buy and sell, more quickly, than would be available to you if you were sitting down at your home computer looking to buy or sell Apple Computer through a discount brokerage account.

 

All of this is perfectly legal, but Lewis points out that it is also shady. Why should some buyers and sellers have millisecond advantages over others? The companies that see more of the market, more quickly, are able to jump in ahead of you and me and buy stocks at lower intraday prices, and then jump ahead 15 seconds later and sell to the highest bidder before you and I would even see that bid on our screen. They can buy the stock you put in an order for and sell it to you at a fractionally higher price through the normal market-matching mechanisms. This way, they can squeeze out additional pennies and nickels on each transaction, and if they do this thousands of times a day, it adds up to real money--millions of dollars a year.

 

Why is this irrelevant to you? Many of those lost dollars are coming out of the pockets of day traders, ordinary people who are foolish enough to think that they can outwit the markets by moving into and out of individual stocks several times a day, or professional traders at hedge funds who may not have access to the fastest server or a direct feed into the Nasdaq servers. There are tens of thousands of these investors, and many of them, watching the 60 Minutes report, discovered for the first time that they are getting routinely fleeced by Wall Street's money machine.

 

However, if you're invested for the long term, it really doesn't matter how many times the stocks you own inside of a mutual fund or ETF, or directly in your retirement account, change hands or at what price every few minutes. It doesn't even matter whether your stocks are up or down in any given month or year, so long as the underlying companies are building their value steadily over time. Your time frame is eons compared with the quick-twitch traders, who hope to be in and out of your stock in minutes rather than decades. Your mutual fund that buys when a stock seems cheap might, if it's careless or unsophisticated, give up fractions of a cent on its purchases, but that likely isn't going to have a measurable impact on your long-term investment returns.

 

Somehow, this important fact was lost in the 60 Minutes interview. The interview also didn't mention that things can go horribly wrong in the arcane and predatory world of rapid-fire trading. The Hall of Fame of trading losses includes $9 billion lost in credit default swaps by a single Morgan Stanley trader from 2004 through 2006, or the $7.2 billion lost by Societe Generale trader Jerome Kerviel over a few days in 2008, or the $2 billion "London whale" losses in 2012. They--and many others--used their milliseconds speed advantage to generate staggering losses, proving that even the smartest operators aren't always raking in the profits.

 

In the end, the interview tells us several things. First, it exposes, yet again, the fact that the Wall Street culture will go to great lengths to grab money out of the hands of unwary investors. One wishes that the 60 Minutes interviewers had asked a simple question: what economic purpose is served by fast-twitch traders, trying to make money for their wirehouse employers by purchasing and selling individual stocks multiple times a day ahead of other investors? Is this benefiting the economy in some way?

 

Second, the interview makes plainly clear the folly of an average investor trying to outsmart the markets with short-term trading activities.

 

And finally, for those who can see the big picture that is never explained in the 60 Minutes interview, these revelations confirm the wisdom of having a long-term investment horizon. When you measure returns over three-to-ten year time horizons, the milliseconds don't matter.

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

 

 

Sources:

http://www.cnbc.com/id/101537874

http://money.cnn.com/2014/03/30/investing/michael-lewis-flash-boys/

http://www.theguardian.com/business/2014/mar/31/us-stock-market-rigged-michael-lewis

http://newsfeed.time.com/2012/05/11/top-10-biggest-trading-losses-in-history/slide/7-jp-morgan-this-incident-2b/

 

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GREAT NEWS!

 

 

 

 

April 4, 2014

 

We are pleased to announce a new addition to Kohlhepp Investment Advisors. Todd Purring has been hired as our new Operations Manager. Todd has his Series 7 and Series 66 licenses and previously worked for 8 years at Lincoln Investment Planning, Inc. He graduated from West Chester University. He lives in Furlong with his wife Rebecca and his two sons Bobby and Joey. We look forward to a long and rewarding working relationship with Todd. Next time you speak to Todd, please welcome him.

 

We are also pleased to announce a new addition to our family. Mary Beth and her husband Marty welcomed a baby girl into the world on Tuesday, March 18th. Ella Sharon Roche was born at Doylestown Hospital at 11:08am. She weighed in at 7 pounds, 1 inch and was 20 inches long. Mary Beth, Marty and Ella are all doing well.

 

We look forward to welcoming Mary Beth back to the office in the summer. At that time, we will have our full team in place of Ed Sr., Ed Jr., Joann, Todd, and Mary Beth.

 

Kind Regards,

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

 

 

 

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China, Ukraine & the Markets - New economic & political concerns are putting stocks to the test

 

 

March 18, 2014
 

 

 

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  

       

 Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

   

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]

 

 

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20 Things You Probably Don't Know About the Russian Incursion into the Ukraine

 

 
 

 

March 7, 2014

 

Our hearts and prayers go out to the people of Ukraine, as they undergo both an internal political crisis and what appears to be military intervention from Russia. For people of a certain age, the current events, with tanks rolling across the Russian border into a neighboring nation that wants to exercise its freedom, it feels a bit like the Cold War days all over again.
 

Whenever we see troop movements and fires raging in the streets of a capitol city the size of Chicago, our instinct is to assume the worst and move our money to the sidelines. But is this really the best strategy? Some commentators see any market downturn as a buying opportunity, since stocks are going on sale simply because of unfounded fear of economic aftershocks.

Here are some facts that you might not know about what has, hitherto, been a relatively quiet new member of the world economic community. 

1) The word "Ukraine" means "borderland" in proto-Slavic. It appears to have acquired this name simultaneously from Poland, Austria and Russia, referring to the territory that sits across the border of so many European nations and Russia. In fact, the Polish referred to their troops stationed in this area as Ukranians--that is, borderlanders. Since the country became independent from the Soviet Union, it is no longer referred to internationally as "The Ukraine."

2) Ukraine's currency is the hryvnia, adopted in 1996 after the country suffered the greatest one-year bout of hyperinflation in global economic history. (Zimbabwe has since broken the record.) Today, one dollar will buy 9.6 hryvnias. A euro will buy 13.3 of them.

3) After Russia, Ukraine has the largest military presence in Europe. Ukrainian troops have been deployed as part of international peacekeeping missions in Somalia, Kosovo, Lebanon and Sierra Leone, and has engaged in multinational military exercises with U.S. military forces. NATO has accepted Ukraine as a member pending a national referendum on the matter--which will obviously be delayed until the conflict with Russia has played itself out.

4) Ukraine has one of the world's most active space programs. The National Space Agency of Ukraine has launched six self-made satellites and a total of 101 launch vehicles. The country also manufactures the An-225 aircraft, the largest aircraft ever built. 

5) Due to low birth rates, Ukraine's population is declining at the sixth fastest rate in the world behind the Cook Islands, the Federated States of Micronesia, the Northern Mariana Islands, Niue (an island nation in the South Pacific) and the Eastern European nation of Moldavia, which borders Ukraine.

6) Nevertheless, Ukraine's largest city, Kiev, has a higher population (2.8 million) than Chicago, America's third-largest city. The population of Kharkiv, Ukraine's second-largest city (1.4 million), is greater than San Antonio, San Diego and Dallas, America's seventh, eighth and ninth most populous cities.

7) According to the World Bank, Ukraine's economy is the 51st largest in the world, ranking just behind Peru and the Czech Republic, and just ahead of Romania and New Zealand. But its $7,295 (US) per-capita income (a rough measure of a nation's wealth) ranks 106th in the world, behind Namibia and El Salvador and ahead of Algeria, Micronesia and Iraq.

8) Ukraine co-hosted the Euro 2012 football (soccer) tournament (with Poland), which is one of the major sporting events in Europe.

9) Even though the Chernobyl nuclear disaster occurred in Kiev province, near the border of Belarus,  Ukraine operates the largest nuclear power plant in Europe.

10) Despite comments that Ukraine is divided between ethnic Ukrainians and Russians, 77.8% of the population is ethnic Ukraine, and only 17.3% is Russian.

11) Ukraine is known as the "breadbasket of Europe" for good reason. The country is the world's fourth largest producer of barley, 5th largest producer of rye, 11th largest producer of wheat, the 6th largest producer of oats and the 9th largest producer of soybeans.

12) Russia sells approximately 80% of its oil and gas exports to the European Union through pipelines that pass directly through Ukraine. The European Union receives 25% of its oil and gas from Russian sources through these conduits.

13) Ukraine also happens to be Russia's second-largest customer of petro-fuels.

14) Russia is drilling for oil in the shallow waters of the Black Sea near the Crimean Peninsula, which shows promise of having significant reserves.

15) Among others drilling in the same area: Chevron and Shell Oil. If they begin production under the Ukrainian flag, it would significantly undercut Russia's oil and gas market share and prices, simultaneously boosting Ukraine's economy.

16) When the Russians (as the Soviet Union) invaded Afghanistan in 1979, the U.S. and many Western nations boycotted the 1980 Olympic games, which were hosted in Russia. Is it interesting that Russia decided to move forces into Ukraine immediately AFTER the Sochi Olympics were finished?

17) Among the most likely responses to the Russian/Ukrainian crisis is the cancellation of the upcoming G8 summit in Sochi. Another possible response might remove Russia from the G8 club. This would embarrass Russian strongman Vladimir Putin at home and isolate him (and Russia's economy) abroad.

19) Russia's economy could be the big loser in the aftermath of the Ukrainian crisis. Share prices for companies based in Russia declined by 10 percent the day after mysterious soldiers took over the Crimean peninsula, also triggering an outflow of domestic currency that Russia desperately needs to invest in modernizing an economy largely (today) based on selling abroad what is pumped or mined out of the ground. 

20) The threat of disruption of trade between Western nations and Russia (either due to sanctions or reluctance to deal with a country that doesn't seem to be focused on following international law) cost the Russian economy $60 billion in a matter of days--more than the total cost to stage the Sochi Olympics.

21) (bonus) Let's assume that we are not headed toward a world war. Several commentators have unhelpfully pointed out that the Crimea became the flashpoint for World War I, but the world is somewhat different today. There could be some impact from higher energy prices in Europe if the Ukraine pipelines are disrupted temporarily, but Russia needs to sell its oil and gas as much as Europe needs to buy it. Unless someone is heavily invested in Russian stocks, the crisis will likely be seen as a portfolio non-event.

We will continue to watch the events and keep you posted. 

 

Sincerely,

 Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

 

 

Sources:

www.bobveres.com

http://www.cnbc.com/id/101458530

http://redmoneyupdate.com/tag/ukranian-crisis-and-how-it-may-impact-investments/

http://www.fool.com/investing/general/2013/12/10/growing-uncertaintly-in-the-ukraine-could-impact-l.aspx

http://en.wikipedia.org/wiki/List_of_largest_producing_countries_of_agricultural_commodities

http://en.wikipedia.org/wiki/Ukraine

http://www.reuters.com/article/2014/03/03/us-urkaine-crisis-russia-economy-analysi-idUSBREA221D020140303

 

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What about myRA?

 

 

February 21, 2014

 

Chances are, you've heard about the new myRA retirement savings program that was proposed by President Obama during his State of the Union speech. But what is it, and how does it relate to the array of other retirement savings options you already have--including, of course, traditional and Roth IRAs, 401(k) and/or 403(b) plans? Is this something you need to be looking at in addition to, or instead of one of these other options?

 

The new account, which is scheduled to be introduced later this year, will be offered to workers who currently don't have access to any kind of retirement program through their employers. Remarkably, this underserved population is actually about half of all workers, mostly those who work for small companies which have trouble affording the cost of creating and administering a 401(k) plan. The idea is that a myRA would be so easy to install and implement (employers don't have to administer the invested assets), and cost so little (virtually nothing), that all of these smaller companies would immediately give their employees this savings option.

 

Only some of the employees would be eligible, however. Married couples earning more than $191,000, or singles earning more than $129,000, would be excluded from making myRA contributions. And there is currently no law which says that employers would be required to offer these plans.

 

So the first thing to understand is that people who already have a retirement plan at work, or who earn more than the thresholds, shouldn't give the myRA option a second thought.

 

Nor, frankly, would those people want to shift over to this option. Why? myRA functions like a Roth IRA, which means that contributions are taxed before they go into the account just like the rest of a person's salary, but the money will come out tax-free. Anybody can make annual contributions to a Roth IRA; the 2014 maximum is $5,500 for persons under age 50; $6,500 if you're 50 or older--and these are the same limits that will be imposed on the myRA. BUT--and this is a big issue--the myRA is not really an investment account. Any funds that are contributed to a myRA account earns interest from the federal government at the same rate that federal employees earn through the Thrift Savings Plan Government Securities Investment Fund--which is another way of saying that the money will be invested in government bonds.

 

Why does that matter? Retirement accounts that invested only in the stock market earned double digit returns from their stock investments last year. The government bond investments that would have gone into a myRA earned 1.89% last year--which is below the inflation rate. In real dollars, that was a losing investment.

 

Another big issue is the employer match. Many workers who have a traditional 401(k) account get some of their contributions matched by their company, which effectively boosts their earnings. myRA accounts will get no such match.

 

The Obama Administration clearly understands the difference between saving in a government bond account and actual investing; there is a provision that whenever a myRA account reaches $15,000, it has to be rolled into a Roth IRA, where the money can be deployed in stocks, bonds or anywhere else the account holder chooses. The program seems to be designed to encourage younger workers to start saving much earlier than they currently do. Statistics show that the median retirement account for American workers age 25-32 is just $12,000, and 37% have less than $5,000. 

 

Will they be motivated to save when myRAs roll out at the end of the year? Some commentators have noted that the money can be taken out of the account, for any reason, at any time, with no tax consequences. That is not a great formula for long-term savings. But it does make the myRA account a convenient way for a worker just starting out to build up a cash reserve which could serve as a cushion against job loss or unexpected expenses like car repairs. If it is not needed, the account could eventually grow into a retirement nest egg.

 

Commentary: We believe that this new myRA account will likely see minimal success. There is very little incentive to begin such an account.

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

 

 

Sources:

http://www.dailyfinance.com/2012/11/14/retirement-savings-by-age-how-do-you-compare/

http://www.marketwatch.com/story/the-trouble-with-obamas-myra-plan-2014-01-31

http://www.foxbusiness.com/personal-finance/2014/02/12/what-all-fuss-about-myra-accounts/

 

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The Optimistic Data You Never See

 

 

February 20, 2014

 

If you want to feel depressed about the economy and the outlook for the investment markets, there are always pundits and media outlets to oblige you. I'm sure you're still seeing sober forecasts that the world is running out of oil and food, the U.S. economy was still mired in a painful hangover from the recession, that manufacturing jobs are fleeing America in droves and the federal government is on a fast track to a Greece-like fiscal bankruptcy. 

 

What sane person would invest in a world that is rapidly going to hell in a handbasket?

 

Before you buy your gun and cabin in the woods, before you stuff gold Krugerrands under the floorboards and a few years worth of canned food and bottled water in the pantry, you might consider some of the facts and figures that we aren't hearing about from the doomsayers.  

 

Let's start with oil--specifically, the oft-quoted prediction that the world has experienced "peak oil," that we are using up our oil reserves, which will trigger a collapse of the global energy economy. Google "peak oil" and you can still read the doomsaying reports. But according to Wikipedia's latest entries, the OPEC countries actually have dramatically MORE reserves today than they did in 1980, and the numbers have been going up year-by-year. In 1980, Saudi Arabia reported 168 billion barrels of reserves, and the assumption was that most of its oil had been found and would be used up within 20 years. After 30 years of pumping oil and selling it to the world, Saudi Arabia is now estimated to have more than 264 billion barrels of oil in the ground. In 1980, Kuwait had an estimated 68 billion barrels of reserves. After thirty years of diligently pumping oil out of the ground, the country now has an estimated 101.5 billion barrels in the ground. Iraq's reserves have grown from 30 billion to 143 billion, the biggest jump of any OPEC nation except Venezuela, which had 19.5 billion barrels of proven reserves in the ground in 1980, and now is estimated to have more than 296 billion.

 

But the biggest oil and gas story in the world, by far, is the U.S. Fracking technology is controversial, but there is no controversy about its impact on the supply of oil and gas that is flowing into the U.S. economy at an ever-faster rate. In the ten years between 2001 and 2010, recoverable crude oil in the ground has risen from 144 billion barrels in the U.S. to 219 billion, and recoverable natural gas has risen from 1.28 trillion cubit feet to 2.54 trillion.

 

This impacts the economy in several ways. First, it provides American manufacturers and consumers with a steady supply of reliable, cheap energy. Second, it reduces imports of foreign oil, helping our economy balance its trade deficit. In fact, the U.S. has become one of the world's largest exporters of natural gas.

 

This leads to another gloom and doom issue: the alleged decline of America's manufacturing industry. One of the untold stories is that the combination of wage increases in China and elsewhere, plus the availability of cheap energy, has made it more attractive for American companies to bring their manufacturing plants back home--and for foreign-based companies to relocate their plants here, convenient to a huge market for the things they manufacture. Economists have even coined a new term for this trend. They call it "reshoring."

 

Some recent examples: General Electric moved the manufacturing of washing machines, refrigerators and heaters from a China factory to a Kentucky factory that had been rumored to be on the verge of closing. Apple has recently moved the production of its existing Macintosh lines from China to the U.S. 

 

According to the Boston Consulting Group, December 2013 marked the 53rd consecutive month of expansion for U.S. manufacturers--a statistic you will never see in the newspapers. To find out what was going on, the organization surveyed decision makers at larger companies, and found that 48% were either strongly considering relocating manufacturing jobs back to the U.S or had actually done it.

 

So why is the U.S. still mired in a recessionary economy? Because it isn't. If you look at a graph of the monthly percent changes in the American gross domestic product, you see frightening declines in 2008 and 2009--a drop of 8.3% in the fourth quarter of 2008 alone, when (as you may remember) Wall Street nearly wrecked the global economy. From 2010 forward, however, growth has been steady quarter over quarter, with only a brief decline in 2011 when certain members of Congress decided it might be a good idea to default on America's debt obligations. Last year's growth rate was positive even though the two-week government shutdown cost the economy some $55 billion in lost productivity.

 

But what does all this matter if the government is on the fast track to bankruptcy?

 

This may be the most underreported story of all. According to the Congressional Budget Office, our nation's federal deficit shrank 37% in 2013, in part because revenues are up as the economy expands, in part because of the drawdown of U.S. military involvement in Afghanistan, in part because of the automatic spending cuts known as the sequester. Total U.S. government revenue exceeded spending by $53.2 billion last December, compared with a $1.19 trillion deficit in December 2012. In the past two fiscal years, government outlays have dropped from 22% of GDP to 20.8%, and some respected economists are now actually expressing concerns that the deficit is falling too quickly.

 

If you add all these trends up, our total economic picture is not nearly as gloomy as most people seem to believe. That doesn't, of course, mean that there are no challenges ahead; there are always challenges ahead. It doesn't mean that investments are going to go up; the short-term swings of the investment markets are largely determined by emotions, and few investors have access to the information that you have just read.

 

But the positive trends might give us hope that, despite all the negative reporting and self-serving forecasts of doom, the American economy is actually moving forward with some confidence. You might not need that refuge in the woods after all.

 

 

 

 

Stay warm and look for the sunshine and Spring flowers!

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

 

 

 

Sources:

 

http://en.wikipedia.org/wiki/Oil_reserves

 

http://oilindependents.org/oil-and-natural-gas-reserves-definitions-matter/

 

http://www.economist.com/news/special-report/21569570-growing-number-american-companies-are-moving-their-manufacturing-back-united

 

http://www.questia.com/library/journal/1G1-302110425/u-s-manufacturers-coming-home

 

http://www.telegraph.co.uk/technology/news/10092271/Forget-China-technology-manufacturing-is-coming-home.html

 

http://www.ft.com/cms/s/0/e14d6cae-249d-11e3-8905-00144feab7de.html#axzz2tJt3TE82

 

http://www.tradingeconomics.com/united-states/gdp-growth

 

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8 Questions to Ask your CPA at Tax Time

 

 February 17, 2014



It’s time to gather paperwork and prepare your returns by April 15th. Since it’s likely been a year since you last spoke to your CPA, it’s important to outline any changes in your personal situation and familiarize yourself with revisions in the tax code. Here are eight important questions to discuss with your CPA this tax season.

 

You probably know the tax-time drill by now: As you prepare to meet with your tax accountant, you gather W-2 and 1099 forms, receipts, banks statements, and mortgage documents.

 

But that’s just the beginning. The real issue is what has changed in your life the past year? The paperwork tells your financial story, but there may be a lot more going on with your life than can be seen in your documents.

 

A good CPA will ask you questions, but there’s no guarantee they’ll be comprehensive. Only you know everything that has happened in the past year. You have the responsibility to give the CPA the right information—and then ask the question: “Does this make a difference?”

 

1. What kind of difference does a family change make? Or how about a major purchase?

 

Be sure to tell your CPA about any births, adoptions, marriages, separations, divorces, or deaths. Have your children reached a milestone age like 18 or 21? Have they left school and started jobs, possibly changing their deductibility status?

 

Death in the family is especially important: Does an inheritance trigger a federal or state estate tax? If an inheritance includes an IRA or 401(k), the tax rules are strict and, failure to properly manage the inheri­tance could have major tax consequences.

 

Major purchases can also have a big ef­fect. A second house may mean another set of home-related deductions. But prob­ably not a third house, as the homeowners can typically only get deductions from two residences.

 

2. What will my tax bracket be in 2014?

 

Your tax bracket is the rate at which the last dollar of income will be taxed. Know­ing your tax bracket helps you and your ad­visor calculate the tax efficiency of various investment or financial planning proposals.

 

A paycheck change is only one factor, so don’t make immediate assumptions: tax brackets can change for many reasons, including changes in tax law as well as changes in your tax filing status.

 

Tax filing status depends on whether you are married or single and whether you have dependents to claim on your tax return. A change in income or an increase in interest and dividends or even gambling or lottery winnings could also change your tax bracket.

 

3. Can you help me estimate my income for 2014?

 

Go beyond salary. Bonuses, freelance as­signments, investment income, alimony winnings, and more all play a role.

 

And it’s not enough to know gross income. It’s also important to have an estimate of adjusted gross income, modifications to adjusted gross income, and taxable income. Each of these types of income is dependent on various deductions or credits that need to be estimated in order to come up with projections for the new year.

 

Why is this even important? An accurate estimate of 2014 income allows you to properly manage retirement savings plans, for example. And it helps to make sure your financial advisor and your CPAs are com­municating with each other and working from the same page.

 

In order to estimate the various forms of income for 2013, you’ll need to provide your tax advisor with certain information so the numbers can be crunched. For ex­ample, your CPA will need to know if you plan on making approximately the same amount of charitable contributions this year as you did last year. And if there was a one-time or unusual event last year, such as a sale of an asset, the CPA will need to adjust the estimate accordingly.

 

4. Do I have any remaining loss carryfor­wards going into 2013?

 

Loss carryforwards are tax losses as a result of selling investments at a loss. The IRS only permits you to deduct investment losses to the extent that they are offset by gains of up to $3,000 a year. Any losses in excess of this can be carried forward to future tax years, hence the name “loss car­ryforwards.”

 

Your CPA can help you determine your loss carryforwards by looking at your past tax returns. The answer can help you better understand how investment activity af­fects your tax situation. Occasionally, your financial advisor may suggest that you sell some assets to absorb some of these previ­ous losses for precisely this reason. “Tax loss harvesting” is traditionally a year-end activity, but it really should take place throughout the year as investment oppor­tunities present themselves.

 

5. Should I increase my retirement plan contributions?

 

Type of Retirement Account

Maximum Contribution

401(k), 403(b), Most 457 & Federal Govt Thrift Savings

$17,500

IRA

$5,500

IRA Catch Up Contributions

$1,000

401(k) Catch Up Contributions

$5,500

                   Source: IRS

 

The IRS hasn’t increased the contribution amounts for most types of retirement plans in 2014, so there’s no incentive there for making contribution increases.

 

However, that doesn’t mean you should just leave it as is. Phase-out limits for various plans have increased, so even if your in­come is up, you may still be able to put away more. This is a good conversation to have with all of your advisors this time of year.

 

6. Do you have any recommendations for reducing my 2014 taxes? What about 2015 and beyond?

 

CPAs can recommend a number of strate­gies that might help reduce tax liability in the future. A variety of laws, such as ACA, have changed the playing field. Some of the strategies may be complex and may need the input of your financial advisor. Others may be within your control. For example, if you are a small business owner, you may have the ability to accelerate expenses into a new year.

 

7. Should I change my tax withholding for 2014?

 

Various situations may mean that you need to change your withholding on your Form W-4 with your employer. If you’ve gotten married, divorced, or had a baby, you’ll need to make changes on your W-4. Also, if you’ve been getting large tax refunds, it may make sense to increase the number of exemptions you take on the W-4 to match up what you pay in tax with your actual tax obligation.

 

8. Is there anything my financial advisor can do to help my tax situation?

 

There’s a close relationship between fi­nancial planning and taxes. That’s why it’s good to ask your CPA this question and pass the answer along to your financial advisor. The better informed your advisors are about your tax situation, the more ef­fective they can be in planning and manag­ing your investment and financial affairs.

 

Don’t assume that tax efficiency is the only goal. If you’re retired and in a low bracket, for example, it may not be worth it to accept a low return to take advantage of tax-advantaged investment like municipals. This is the perfect opportunity for three-way communications between you, your financial advisor, and your CPA.

 

As always, please call us with any questions. 

Sincerely,

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA
 
Edward J. Kohlhepp, Jr., CFP®, MBA

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.


By Richard J. Koreto

Richard J. Koreto has been a journalist covering tax and finance for 20 years. He is the author of “Run It Like a Business: Top Financial Planners Weigh In on Practice Management” and is a past president of the New York Financial Writers’ Association.

Copyright © 2014 by Horsesmouth, LLC. All Rights Reserved.

IMPORTANT NOTICE This reprint is provided exclusively for use by the licensee, including for client education, and is subject to applicable copyright laws. Unauthorized use, reproduction or distribution of this material is a violation of federal law and punishable by civil and criminal penalty. This material is furnished “as is” without warranty of any kind. Its accuracy and completeness is not guaranteed and all warranties expressed or implied are hereby excluded.

 

 

 

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DO YOU OWN A CREDIT/DEBIT CARD?

 
 
January 28, 2014


By now almost everyone has heard about the theft of credit card numbers as a result of the data breach at Target, Neiman Marcus, and possibly others, such as Michael’s, etc. However, in addition to the credit card numbers, other data was stolen as well: names, mailing addresses, email addresses or phone numbers.


My wife shopped at Target before Christmas and once we heard about the hacking of the data we took pre-emptive action. We immediately called our credit card company and had a new card issued. The possible dollar loss was not the issue because most credit card companies will not hold you liable.


Here is the biggest problem: Many people today shop with debit cards or combination credit/debit cards. Debit cards that can be used at stores without a PIN give thieves direct access to your bank account. So if you have a debit card that can be used without a PIN number replace it immediately. ONLY use a debit card which needs a PIN number for access (such as ATM debit cards). Do not use combination credit/debit cards which only require a signature to make a purchase – there is too much risk!


Be especially alert to “phishing” schemes where hackers send you email or text messages which appear to be sent by Target or Verizon or some other reputable company asking you for personal information. Never send personal information via email. This is how many identities are stolen.


In the next few years credit card companies will update their technologies and issue new cards embedded with chips and requiring PIN numbers with each use, but we are not there yet.


So here is what you should do NOW!
 
  • If you have a debit card that can be used without a PIN number to shop – CANCEL it.
  • Only use debit/ATM cards that require a PIN number.
  • If you shopped at any of the stores which were hacked, call to cancel your card and have it replaced. If you are not sure, do it anyway.
  • Be aware of “phishing” schemes!  When in doubt call the company.
  • Make sure you take advantage of the annual free credit reports by going to www.annualcreditreport.com.

If you have any questions about any of these issues, please call our office.


Stay warm!


Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

       http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

 

 

 

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THE GRINCH'S VIEW OF THE MARKETS!

 
 
January 3, 2014


The markets have had a pretty good run since the great recession of 2008. However, The Grinch believes that the stock market is getting quite frothy at these levels and here are some of the reasons:


History of Dow Jones Industrial Average Decline


TYPE OF DECLINE

FREQUENCY

LAST OCCURRENCE

-10% or more

About once every year

October, 2011

-15% or more

About once every 2 year

October, 2011

-20% or more

About once every 3.5 years

March, 2009

            Source: Capital Research & Management, Inc.


The last significant market decline of 20% or more occurred in March of 2009. According to Forbes, the current cyclical bull market is more than 4 ½ years old and cyclical bulls last 3.8 years on average.


In late November, The Wall Street Journal wrote that a poll of investment newsletter writers put the percentage of bears at 14.4%, the lowest level since 1987. Then came the October ‘87 market crash. The Grinch sees more and more people jumping into the stock market fearing they are missing the train. Following the crowd is like looking in the rearview mirror to steer your car.


There are many other signs that we are at or nearing a market top. No one knows for sure, but the Grinch “feels” that we are at a top.


This is a very negative letter to start the New Year. However, we feel that it is the responsibility of our firm to protect your assets as best we can, and now is a time to be cautious.


In the next newsletter we will look at the glass as “half full” and give you reasons to be more optimistic.


What to do now: sit tight and don’t make any drastic moves either way. We will be watching and monitoring the situation.


Happy New Year! Let’s hope the Grinch is wrong!   


   

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

  http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 
Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.


 

 

 

 

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Let the Taper Begin - An Early Christmas Present!

December 20, 2013
 

 

The Federal Reserve Board has made its long-awaited announcement that it will begin to scale back ("taper," in WallStreetSpeak) its QE3 stimulus program. The last time the Fed even mentioned starting to taper back, last Spring, global stock markets and bond investors panicked and sent the markets reeling. Now, the Fed says that instead of buying $85 billion in Treasuries and mortgage bonds per month, it will only buy $75 billion, and more tapering will come as the economy continues its recovery and the jobless rate continues to fall. 
 

 

With this “Taper” announcement, markets went up and investors cheered. Japan's Nikkei index reached a six-year high, European markets soared and U.S. stocks finished the day at new record prices.
 

 

Does any of this make sense to you? It is actually counter-intuitive.
 

 

The so-called "taper," and the QE3 stimulus program itself, are somewhat unique in the history of investment markets. To understand QE3, imagine that at the auctions where investors buy government bonds and packages of home loans, a bidder ten times the size of Goliath shoves everybody else aside and insists on paying higher prices (and, therefore, receiving lower interest) than any of the other bidders. The Fed's stated goal was to stimulate the economy by driving interest rates lower, making it less expensive for large and small businesses to borrow money, so they can build factories, expand their capacity and hire more people. The problem with this stimulus effort all along was that American corporations are already sitting on tons of cash, and have little need to borrow if they really want to go on a building and hiring spree. The companies in the S&P 500 index reportedly have a record $1.5 trillion in their coffers, up 14% this year alone. Add in the money stuffed under the mattresses of smaller companies, and the total may well exceed $5 trillion.
 

 

The Fed's mortgage purchases probably did make mortgage rates a bit cheaper for home buyers, but it's hard to tell how much. The day after the announcement, 30-year Fannie Mae mortgage rates were up 0.01 percentage point, at 4.42%. That's higher than the low of 3.31% in November of 2012, but still very low by historical standards.
 

 

Savers and long-term investors should breathe a sigh of relief that the Fed is finally easing out of the investment business. Why? For one thing, it means that economists at the Federal Reserve Board believe the economy is finally in a self-sustaining recovery mode. 
 

 

For another, it means the end of uncertainty. When investors are unsure what to expect, they tend to expect the worst, which is why you will read articles saying that the taper will cause interest rates to skyrocket out of control, leading to all sorts of bad things in the economy, possibly including an alien invasion. By the (admittedly early) indications, no such thing is happening, and you can bet that Fed economists are monitoring the situation and plan to nip any catastrophe in the bud.
 

 

But at the same time, we can expect interest rates to go up over the next year or two at least, which is great news for older Americans who have been living on a fixed income with CD rates barely higher than what they would get if they stashed their retirement money in a cookie jar. However, we all know that banks raise interest rates on loans much faster than on the CDs.
 

 

For the economy as a whole, there is still plenty of cash to lend to any large company that wants it, housing is still more affordable than it was before the 2008 meltdown, and inflation is actually (and stubbornly) lower than the government's preferred target rate. Investors were wrong to panic last Spring, and they are right to cheer now as the biggest, clumsiest bond buyer in history starts cautiously easing away from the auction table.
 

 

If the tapering and interest rate changes are gradual, the markets can probably digest it more easily. Dramatic change could cause more chaotic results. 
 

 

Let’s be thankful for this small holiday gift! Happy Holidays from all of us to you and your family!
 

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

   http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

Sources:

www.bobveres.com

http://www.cnbc.com/id/49519419

http://www.cnbc.com/id/101279385

http://www.foxbusiness.com/personal-finance/2013/12/18/how-fed-taper-announcement-could-impact-your-finances/

http://www.bloomberg.com/news/2013-12-18/mortgage-bond-yields-little-changed-after-fed-taper-announcement.html

http://money.cnn.com/2013/12/18/investing/world-markets-thursday/

http://money.cnn.com/2013/12/18/news/economy/federal-reserve-taper/


 

 

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The Overlooked Beneficiary Designation

 

December 19, 2013
 

 

Chances are, when you buy life insurance, you put a lot of thought into it. How much coverage do you need? Are you covering the potential loss of income due to premature death, or will you use the proceeds to pay estate taxes or provide an inheritance? What kind of coverage do you want?
 

 

But many people who shop for life insurance spend almost no time considering how to fill out one of the most important parts of their policy: the part of the form where you name the beneficiary.
 

 

Why is this so important? Let's say you name your estate as the beneficiary, and then decide who will receive your assets, from your estate, in your will. (You have a will, right?) This approach exposes your life insurance proceeds to state estate taxes, and also to federal estate taxes. As it stands now, the first $5.25 million of estate assets are exempted from federal taxes, so if you die tomorrow with less than that in your name, you may not have to worry about paying a chunk of your death proceeds to Uncle Sam (rather than your loved ones). But do you want to bet that the exemption will still be that high when you pass away? And do you want to bet that you won't someday be worth that much or more, when your life insurance face amount is eventually included in total? 
 

 

Meanwhile, state estate tax thresholds can start as low as $1,000 (as in PA). Those taxes will likely take a bite out of the money received by your beneficiaries.
 

 

It's more tax-efficient to put your spouse's name on the beneficiary form. But if you do, you want to make sure you name one or more secondary beneficiaries. Why? If you and your spouse die at the same time, and no secondary beneficiaries are listed, then the life insurance proceeds go right back into your estate. Even if you predecease, if your spouse dies without naming a proper beneficiary, what's left of your life insurance proceeds could be subject to estate taxes.
 

 

Couldn't you name your children as beneficiaries? This could work from an estate tax perspective if you're willing to give up control of the proceeds of the policy. But then you leave your spouse without those assets that he or she may need to live on. And a bigger problem is naming one child as the beneficiary and asking him/her to divide the money among the others. Why? When your daughter receives the life insurance proceeds, it arrives tax-free. But when she pays a third of the money to her two brothers, those could become taxable gifts, from her to them. Once again, you've invited Uncle Sam to the table. And can you be sure the kids would split the proceeds?
 

 

Professional advisors often recommend another beneficiary: an irrevocable life insurance trust. This requires you to assign the ownership of the policy to the trust, and gift the amount of the insurance premiums to the beneficiaries of that trust, with the proviso that they use that money to buy the policy and keep it current. You won't have any control over the policy or the premiums, but this makes sure that your life insurance won't be included in your taxable estate. And if the trust is drawn up properly, it could mean that this money will be available not just to your spouse, and then your kids, but also your grandkids and their kids, all without having to pay estate taxes. This strategy only makes sense if your estate will exceed $5,250,000.
 

 

The most important question is: if you have a life insurance policy currently, do you know who your beneficiaries are? Now is a good time to check your beneficiary designations on your life insurance, retirement plans and IRAs.
 

 

Have a great holiday season!
 

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

   http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

Source:

www.bobveres.com

 

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Healthcare Mathematics

December 10, 2013
 

 

The Affordable Care Act has gotten its share of bad press recently, specifically regarding the federal website problems where people can enroll. (The states seem to have hired much better website developers.) And we are reading articles that compare the cost of carrying health insurance vs. the tax penalty for going uninsured. Many will choose the latter. According to an analysis last year by the Congressional Budget Office and the Joint Committee on Taxation, an estimated six million people will opt to forego health insurance and pay the tax penalty instead. 
 

 

The numbers look straightforward. In the 2014 tax year, the tax cost of going bare on health insurance will be $95 or 1% of the portion of your modified adjusted gross income that exceeds the federal income tax filing threshold of $10,150. A person earning $50,000 is looking at a $400 tax penalty; that rises to $900 for a person earning $100,000. A person age 30 would have to pay $2,800 in annual premiums, on average, to buy a typical silver plan on an exchange--the cheapest option. (Remember: these numbers are for the first year only. The penalty steps up in subsequent years. See our Navigating the New Health Insurance Environment newsletter from September 20, 2013 for more details. )
 

 

So, by this simple calculation, you're looking at $2,800 (or more in some states) to the insurance company, vs. $95, or $400, or $900 to Uncle Sam. What's the catch?
 

 

The catch is that this exercise in basic math leaves out the possibility that the uninsured person will actually need the coverage. A recent New York Times article (http://www.nytimes.com/2013/11/20/your-money/weighing-the-risks-of-going-without-health-insurance.html) noted that one of the top five reasons for younger persons to visit the hospital is a back injury--a herniated disc or cervical spine disorder. The average cost for treatment: $4,890. Add in $400 in tax penalties, and the total cost for the uninsured patient is $5,290. If this same person had bought the silver plan, the overall cost would have been the $2,800 premium plus $821 in out-of-pocket costs--or $3,621. Asthma treatment is fairly common--and once again, a patient going in for treatment will wish he'd opted to buy coverage rather than go bare.
 

 

There is no way to estimate the chances that this young person will incur any of a variety of illnesses, accidents, health problems or other maladies requiring expensive medical attention. But if he does, having medical coverage will pay for itself in two ways. First, it won't bankrupt him, because there is a cap on out-of-pocket costs. And second, he'll have the insurance company negotiating the costs of coverage, which can be dramatically higher for the naive patient who arrives in the hospital with no bargaining power and no incentive to negotiate with the person who might be saving his life.
 

 

That doesn't mean everybody should buy coverage. But as the Times article points out, the calculus of going bare is not as simple as some of the press coverage might have you believe.
 

 

Now here’s the real problem: most young people, i.e. 20 somethings and 30 somethings “feel” that they are invulnerable and don’t believe that they need health insurance….so why should they pay for it?   And to make the system work (Obamcare), young and healthy people have to enroll to keep the system solvent. If they don’t, and that seems to be one of the major problems at the moment, there will be no feasible way of balancing the system.  Think about it (obviously the government hasn’t): all people at any age who can afford it and are presently without health insurance and have any health issues at all will enroll immediately.  Why is it that “we” can see this and the government cannot?
 

 

Enough for now.  Stay tuned.  This is an ongoing and developing issue.
 

 

On a brighter note: Happy Holidays!
 

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA


 

   http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

Source:

www.bobveres.com
 

 

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JFK Shot: How Wall Street Reacted 50 Years Ago

 

November 22, 2013


Markets panicked, then closed. A shocked nation mourned. And the reins of power transferred quickly. The world’s oldest democracy had endured—again.


By Todd Cohen


“Let every nation know, whether it wishes us well or ill, that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe to assure the survival and the success of liberty.” –JFK inaugural address, 1961


It was 1:39 p.m., Friday, Nov. 22, 1963.


Walter Deemer, then a 22-year-old research trainee at Merrill Lynch at 70 Pine St., was taking a break from his job on the wire inquiry desk, where he fielded research-related questions from the firm’s branches.


He was leaning on the Merrill Lynch newswire, a “clunky floor-model Teletype machine,” and watching the tape, when the machine “haltingly printed out, letter by letter, the word ‘F-L-A-S-H’” and its bell rang four times.


Deemer writes about the episode in his book Deemer on Technical Analysis. He and his co-workers figured the news might be that a firm involved in a salad-oil scandal unfolding at the time had gone bankrupt.


But they, like thousands of others working on Wall Street and millions throughout the world who heard the news, were stunned by the announcement that was slowly transmitted, one character at a time: “UPI REPORTS KENNEDY SERIOUSLY WOUNDED. PERHAPS FATALLY BY ASSASSIN WHO SHOT AT HIS MOTORCADE IN DALLAS.”


“It was just shock,” says Deemer, now 72 and president of DTR Inc., a market strategy service in Port Saint Lucie, Fla., for institutional investors. “It was a devastating event.”


Sudden impact


The Dow, which had closed at 732.65 the previous day and hit a high of 739.00 earlier that Friday, quickly plunged to a low of 710.84 before trading was halted at 2:07 p.m., when it was at 711.49, says Richard Sylla, Henry Kaufman Professor of the History of Financial Institutions and Markets at the Stern School of Business at New York University.


There’s a lot of uncertainty every day about what’s going on in the world,” says Sylla, who in 1963 was a 23-year-old, first-year graduate student in economics at Harvard. “When something unexpected happens, that multiplies that uncertainty by an order of magnitude.”


For investors, the natural reaction to unexpected events is “to want to get liquid, move from a more risky to a less risky position, which you do in the stock market by selling stocks,” says Sylla, now 73. He was sitting in an econometrics class when he heard Kennedy had been shot; Sylla realized the president must have died when, as he left his class at 2 p.m., the bell of Memorial Church in Harvard Yard began to toll very slowly.


Fear and uncertainty


Robert Stovall, who was 37 that day and on duty as a securities analyst and director of research for E.F. Hutton at 1 Chase Manhattan Plaza, says he “just sort of froze” when he heard the news about Kennedy.


“I sat around slack-jawed for a while,” then phoned home to “reassure my family that everything was OK with me, and then went home as soon as I could,” he says.


“We didn’t know what was going to happen next,” says Stovall, now 87 and a senior strategist for Titanium Asset Management living in New York City and Sarasota, Fla.


“We thought the Kennedy assassination might be followed up by an even more serious incident,” he says. “We thought there might be a follow-up attack.”


Panic on the floor


Newton Zinder, who at the time was a 38-year-old technical analyst reporting to Stovall, remembers the afternoon began normally.


“Nothing special was going on,” says Zinder, who retired in 1992 as a technical analyst at Shearson Lehman and now lives in Madison, Wisc.


But unconfirmed rumors began flying, spreading panic on the floor of the New York Stock Exchange that led to massive selling.


In that era, he says, “all the transactions occurred on the floor of the exchange, not like today, with computers dealing with each other and very little trading on the floor.”


The floor of the exchange, Zinder says, was where buyers and sellers met and settled on the price of a stock. Each stock had a “specialist” who was “obligated to try to keep the market orderly, even to use his own funds to stem the selling,” he says.


But amidst the rumors that JFK and possibly even Vice President Lyndon B. Johnson had been shot, he says, “the selling became so massive that many of the specialists, after absorbing some of the stock that came in, and then realizing they didn’t have the funds or desire to absorb any more, literally disappeared.”


As a result, he says, trading in many individual stocks stopped five or 10 minutes before the exchange itself closed.


The day after


At Merrill Lynch, Deemer volunteered to work on the skeleton crew of four or five people that the company put in place on Saturday.


“I lived only two subway stops from the office,” he says. “I came in and we were ready to handle inquiries.”


But the office received only one wire inquiry that day, he says, and it was about the restructuring of Ling-Temco-Vought, an early conglomerate that was in the process of spinning off three subsidiaries.


With no work to do, he and his co-workers pored through the New York Herald Tribune and The New York Times, as well as two of the city’s afternoon papers, the New York Journal-American and the New York World-Telegram and Sun, “just trying to comprehend what was going on,” Deemer says.

 

“The news tickers were not running,” he remembers. “It was eerily silent.”


Tuesday anxiety


The markets were closed on Saturday and Sunday, and again on Monday for Kennedy’s funeral.


When Deemer returned to his post on Tuesday morning, November 26, “the official mood at Merrill Lynch was one of great apprehension,” he says. “We had no idea whether there would be a wave of buy orders or a wave of sell orders.”


Because “odd lots,” or transactions of fewer than 100 shares, then represented 10 percent of the market, making sense of any trends that day in the face of “thousands and thousands and thousands” of those small trades was tough, he says.


“I just acted normally and did my job,” Deemer says. “And it turned out to be a surprisingly normal day.”


The inquiries he received were like those he handled on typical work days: questions on the last time a company had issued or raised a dividend, or the number of its shares that were outstanding.


“It was normal reference stuff,” he says. “In those days you didn’t have the Internet to look things up on. So you asked the research department.”
 

Quick rebound


Zinder says the early shutdown in trading on Friday left investors and specialists who had wanted to sell stock “with a great deal of anxiety” over the weekend, worrying that they would be stuck with their stock when the markets reopened on Tuesday.


“When the market shot up after it opened, they did better than anybody,” he says.


That day, the Dow hit a high of 746. By December 31, the last trading day of the year, the Dow closed at 762.95, up 7.23 percent from its close on November 22.


“That’s a pretty good rally,” Sylla notes.


Market resilience


The market recovered quickly because, while the Kennedy assassination was traumatic, the military aftershock many people had feared did not take place, the transition to the Johnson presidency was orderly, and the underlying economy was strong, Sylla says.


“The market said, ‘This is OK,’” he says.


It also reopened more quickly than after other shattering events.


 

THE MARKETS IN CRISIS THROUGHOUT HISTORY

Event

Background

Panic of 1873

Silver crash triggers widespread bank runs in May. New York market closes for ten days. Depression ensues.

Start of WWI        July 28, 1914

The New York Stock Exchange closes for four months.

Pearl Harbor Attack Dec. 7, 1941

The market drops 4% on Dec. 8. Over the next 17 trading days, the market hits bottom, falling 10.8%. Recovery takes 257 trading days.

JFK Assassination Nov. 22, 1963

The news triggers a wave of selling, pushing stocks down almost 3%, forcing an early trading close. Markets stay shut for two more trading days. Dow soars up 4.5% when market reopens Nov. 26

9-11 Attacks September 11, 2001

The World Trade Center attacks close the market for nearly a week. Dow drops 14% the week after reopening. But then takes 19 trading days to recover to pre-9/11 levels.

Source: Horsesmouth


“All these things are shocks,” he says. “The global markets go into turmoil when these things happen because investors wonder what to do next. But it’s over with very quickly.”


Staying the course


When he returned to work on Tuesday, Stovall says, he and his co-workers at E.F. Hutton “reminded investors that while negative events historically trigger short-term sell-offs, the resiliency of America’s fundamental and governmental strengths prevailed.”


Investors were “wondering if there were going to be follow-ups to the assassination, some sort of invasion or move to military action,” he says. “I just said, ‘Stay the course.’”


At Merrill Lynch, Deemer and his co-workers were sending a similar message.


“Even during emotional times, it’s best to keep a cool head,” he says. “You had a very emotional time, and investment decisions are best made logically and thoughtfully, rather than emotionally. Emotions are one of the greatest enemies of investors.”

 

Todd Cohen is a freelance writer living in Raleigh, North Carolina.

Copyright © 2013 by Horsesmouth, LLC. All Rights Reserved.

License #: 4280824-375971 Reprint Licensee: Edward J. Kohlhepp

Copyright © 2013 by Horsesmouth, LLC. All Rights Reserved.

IMPORTANT NOTICE This reprint is provided exclusively for use by the licensee, including for client education, and is subject to applicable copyright laws. Unauthorized use, reproduction or distribution of this material is a violation of federal law and punishable by civil and criminal penalty. This material is furnished “as is” without warranty of any kind. Its accuracy and completeness is not guaranteed and all warranties expressed or implied are hereby excluded.

Investment Advisory Services offered through Kohlhepp Investment Advisors, Ltd., a Federally Registered Investment Advisor. Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, Member FINRA/SIPC. Kohlhepp Investment Advisors, Ltd. and Cambridge are not affiliated.

 

 

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What's Next in the Debt Ceiling Debate?

 

Implications for the short term & the long term.

 

November 5, 2013
 

  

In January, will the federal government be shuttered again?At first thought, it seems inconceivable that Congress would want to go through another protracted fight like the one that shut things down for 16 days in October. That could occur, however, if a new budget panel doesn’t meet its deadline.
 

 

Once more, the clock is ticking.By December 13, a group of 30 senators and representatives have to hammer out a bipartisan budget agreement. It must a) reconcile the markedly different House and Senate FY 2014 budget plans passed earlier in 2013, and b) map out a longer-term plan to shrink the federal deficit. If a) doesn’t happen, then the country will be threatened with another federal shutdown on January 15. If b) doesn’t happen, then another round of sequester cuts from the 2011 Budget Control Act will be initiated as of that same date.1,2,3,4
 

 

Does this seem like déjà vu? It does among many political and economic analysts, who fear a repeat of the super committee debacle of 2011, when a bicameral, bipartisan group of 12 Capitol Hill legislators just gave up trying to find a way to shave $2 trillion from the deficits projected for the next decade.4
 

 

This new committee is bigger, and like the super committee, its leaders are far apart politically. Sen. Patty Murray (D-WA) and Rep. Paul Ryan (R-WI) are the budget chairs of their respective chambers of Congress. The key difference lies in the modesty of its ambition. On October 18, Murray told Bloomberg that the committee would aim for “a budget path for this Congress in the next year or two, or further if we can” rather than a “grand bargain” across the next 10 years.1,3  

   

 

Will they manage that? Some observers aren’t sure. Murray co-chaired the failed super committee of 2011, and while Ryan was quiet during the fall budget fight, he recently authored an op-ed piece for the Wall Street Journalreiterating his controversial ideas to slash the deficit by reforming entitlement programs. Still, Sen. Lindsey Graham (R-SC) told Bloomberg that “there’s a real desire to take another effort, not at a grand bargain, but at a sequestration replacement,” and Sen. Jeff Sessions (R-AL) commented that “we don’t want to raise expectations above reality, but I think there’s some things we could do.”1,3,5  
 

  

Leaders from both parties maintain there will be no shutdown in January. Senate Minority Leader Mitch McConnell (R-KY) stated that a shutdown is “off the table” this winter. On CNN’s State of the Union,Sen. John McCain (R-AZ) warned that the public would not tolerate “another repetition of this disaster”; on ABC’s This Week,House Minority Leader Nancy Pelosi (D-CA) said she sympathized with the public’s “disgust at what happened.” These comments do not necessarily imply expedient negotiations ahead.3,6
 

 

The short-term fix didn’t fix everything.As a FY 2014 budget hasn’t yet been agreed upon, the Treasury is still relying on stopgap funding to keep the federal government running through January 15 and “extraordinary measures” to raise the federal debt limit through February 7.2
 

 

The long-term outlook for America’s credit rating didn’t really change.Fitch put its outlook for the U.S. on “negative” and warned of a potential downgrade; Dagong, the major Chinese credit ratings agency, actually downgraded the U.S. from A to A-. Even so, S&P and Moody’s didn’t take action as a result of October’s shutdown; while S&P thinks the shutdown will cut 0.6% off of Q4 GDP, it still gives the U.S. an AA+ rating (downgraded from AAA in 2011).7,8
 

 

America lacks top-notch credit ratings, but few nations have them. In fact, only 11 countries possess the coveted AAA rating from S&P and Fitch plus the leading Aaa rating from Moody’s. If you look at S&P’s ratings for the globe’s ten largest economies, Germany is the only one with an AAA. China gets an AA- with a “stable” outlook and Japan has an AA- with a “negative” outlook. While Russia has the world’s eighth biggest economy, Moody’s, Fitch and S&P all rate it one grade above junk bond status.7
 

 

Is Wall Street all that worried about another shutdown?At the moment, no – because there are several reasons why the next debt debate could be less painful. As the goal appears to be a near-term bargain instead of a grand one, it may be more easily realized. If the newly appointed budget panel fails, the economy can probably weather $20 billion of 2014 sequester cuts. Also, many mid-term elections are scheduled for 2014; do congressional incumbents really want to damage their reputations further with another shameful stalemate?8
 

 

While confidence on Wall Street and Main Street would erode with a repeat shutdown, the Treasury might face a slightly easier challenge in January than it did in October. Sequester cuts would trim the already-shrinking federal deficit further in early 2014, conserving some federal money. As a Goldman Sachs research note just cited, Fannie Mae and Freddie Mac could also make their dividend payments to the Treasury early in Q1, which would also help.8
 

 

Global investors can’t really back away from America. The dollar is still the world’s reserve currency, and China owns about $1.3 trillion of our Treasuries. Those two facts alone should compel our legislators to work things out this winter, hopefully before the last minute.7 
 

 

Clearly there is much ahead in the Debt Ceiling Debate. As always, we’ll be watching it closely and keeping you informed.
 

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

   http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

 

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. 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 - cnn.com/2013/10/17/politics/budget-talks-whats-next [10/17/13]

2 - csmonitor.com/USA/DC-Decoder/2013/1017/A-new-shutdown-clock-is-ticking.-Can-Washington-avoid-a-rerun-video [10/17/13]

3 - bloomberg.com/news/2013-10-18/obama-s-goal-of-grand-budget-deal-elusive-as-talks-begin.html [10/18/13]

4 - tinyurl.com/lchxblz [10/18/13]

5 - cnn.com/2013/10/09/politics/shutdown-ryan/ [10/9/13]

6 - tinyurl.com/lbp8cxn [10/20/13]

7 - globalpost.com/dispatch/news/regions/americas/united-states/131018/credit-rating-debt-explained [10/20/13]

8 - cbsnews.com/8301-505123_162-57608220/5-reasons-wall-street-thinks-the-next-fiscal-feud-will-fizzle/ [10/19/13]


 

 

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Entering the Yellen Years

 

A look at the economist newly nominated to lead the Federal Reserve.
 

 

October 30, 2013
 

  

Janet Yellen – currently the vice chair of the Board of Governors of the Federal Reserve – has been nominated to succeed Ben Bernanke at the helm of the world’s most important central bank. A former UC Berkeley and London School of Economics professor and San Francisco Fed president, Yellen is a globally admired economist with many fans on Wall Street. The way it looks now, in January she will become the most powerful woman in the world.1,2,4
 

 

The average investor doesn’t know that much about Yellen and may be wondering what kind of course Fed policy may take under her watch. So here is a closer look at her. 

 

  

Is Yellen just a clone of Ben Bernanke? It is true, Yellen has often voted in line with Bernanke regarding Fed policy; that was partly why Wall Street cheered her nomination. It also liked the fact that the controversial Larry Summers had withdrawn his name from consideration. Yet there are discernible differences between Yellen and Bernanke.1
 

 

The Fed has a mandate to focus on two goals: the goal of full employment, and the goal of price stability. Some Fed chairs lean more toward the first objective, and some lean more toward the second. While Bernanke built a reputation among his fellow economists as a responsive monetarist, Yellen is known as more of a Keynesian, someone who believes in the power of a sustained government stimulus to promote employment and heal the economy. In fact, earlier this year, she commented that “it is entirely appropriate for progress in attaining maximum employment to take center stage.” 1,2
 

 

So is Yellen an inflation dove? In the eyes of many, yes. She may end up sustaining QE3 longer than Bernanke might have, and putting off significant tapering of QE3 for longer than her predecessor. Interest rates may stay at rock-bottom levels under her tenure for longer than presumed. Since QE3 began, both Yellen and Bernanke have maintained that easing to the tune of $85 billion in bond purchases per month is needed to fight ongoing high joblessness and subpar growth, even with the threat of asset bubbles or the possibility of losses for the central bank when those bonds are sold.1,2,3
 

 

Yellen got it right at a couple of key moments during the 2000s. In 2006, she warned of a housing bubble that could bring down the whole economy, not a particularly dovish moment for her. (Of course, Yellen and her Fed colleagues could have chosen to tighten and try to prevent one from forming 2-3 years earlier.) As the FOMC voted to cut interest rates by 25 basis points in December 2007, Yellen wanted a half-percent cut, stating that “any more bad news could put us over the edge, and the possibility of getting bad news — in particular, a significant credit crunch — seems far from remote.” The Great Recession was a fact of life within a year.2,4
 

   

While Yellen is widely seen as extending the policies put in place during Ben Bernanke’s term with little alteration, the big question is how quickly and how ably the Fed will be able to tighten if inflation becomes hazardous after all this easing. If Bernanke’s legacy is that of a great scholar of the Great Depression who reactively managed the economy out of dire straits, Yellen’s legacy may be built on how well the Fed can control the side effects and the gradual withdrawal of its current accommodative monetary stance.
 

  

As always, we will be in touch as we follow the transition in the new year. Please call with any questions and Happy Halloween!
 

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

   http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

 

 

 

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. 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 - cnn.com/2013/10/10/opinion/ghitis-janet-yellen/?hpt=hp_t4 / [10/10/13]

2 - tinyurl.com/kawhouj [3/21/12]

3 - bloomberg.com/news/2013-10-09/janet-yellen-s-to-do-list.html [10/9/13]

4 - tinyurl.com/mlqgjyf [10/13/13]

 

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Tax Reform Delayed

 

October 23, 2013
 

 

Did you notice anything missing during the partisan squabbling that led to the government shutdown and debt ceiling brinksmanship? Why was nobody talking about reforming our tax laws, which have gotten so complicated that professional tax preparers are taking courses on how the 3.9% healthcare tax on nonwage income, deduction and credit phase outs and higher capital gains rates apply to people who have to take required minimum IRA distributions, and whether that impacts the decision to make a fractional Roth conversion and drive income going forward below the thresholds. 
 

 

Doesn't that sound like a situation that is ripe for simplification?
 

 

While the government shutdown was in its early stages, Bruce Bartlett was explaining the tax reform situation in a keynote presentation to an audience of financial advisors, at the Fall conference for the National Association of Personal Financial Advisors in Philadelphia. Bartlett, author of "The Benefit and The Burden: Tax Reform," and a former assistant secretary for economic policy at the Treasury Department under the George H.W. Bush Administration, noted that our income tax turned 100 during the shutdown--the first U.S. income tax became law on October 3, 1913. Happy belated birthday!
 

 

Today, roughly 40% of all citizens pay the income tax, which is almost exactly the same percentage as it was right after World War II, when the highest marginal tax rate was 91%. The law has become so complicated because the last true simplification effort was the Tax Reform Act of 1986, which dropped marginal rates from 50% to 28% and eliminated a lot of loopholes, credits and deductions. In the intervening 27 years, thousands of pages have been added to the Tax Code, and very little of the underbrush has been cleared away.
 

 

So why didn't the Democrats or Republicans throw tax simplification on the table as a bargaining issue during the shutdown debate? Bartlett said there were two reasons. The first is that the Republican party may have boxed itself into a corner. "Republicans are very keen to reduce the top tax rate on both corporations and individuals to 25% if they possibly can," he told the audience, "but they have also said that this has to be done in a revenue-neutral manner, and they want to ensure that no income class would pay more taxes or a bigger share of taxes than they pay right now."
 

 

The only possible way to achieve that goal is to eliminate deductions. That would mean eliminating at least five and possibly seven or eight of the ten biggest tax breaks. Here's the list. See if you would vote for a candidate who proposed eliminating most of these:

 

  • Exclusion for employer-provided health insurance premiums (Cost: an estimated $760.4 billion over the next four years), 
  • Retirement savings deduction ($708.6 billion)
  • Reduced rate on capital gains and dividends ($616.2 billion)
  • Mortgage interest deduction ($379.0 billion)
  • Earned Income Tax Credit ($325.9 billion)
  • Child tax credit ($291.6 billion)
  • Deduction for state and local taxes ($277.6 billion)
  • Tax deferral on foreign subsidiary income (the only item on the list that applies to corporations: $265.7 billion)
  • Exclusion of capital gains at death ($258.0 billion)
  • Charitable contributions ($238.8 billion)


 

Lowering the corporate tax rate is desirable because--largely due to tax reductions in other competing nations--the U.S. marginal rate is now among the highest in the world. Bartlett noted that today U.S. corporations have stashed $1.5 trillion in offshore accounts using a variety of tax loopholes; much of that money would be repatriated back to the U.S. if those loopholes were closed, and if the tax rates were lower. But lowering those rates would require the government to collect more tax revenues from individuals--a political non-starter.
 

 

What's the other reason why tax reform isn't happening? Bartlett said that the Constitution specifies that all revenue bills must originate in the House of Representatives, where the Ways & Means Committee is chaired by David Camp (R-MI), a tax reform enthusiast. Trouble is, Camp's 6-year chairmanship will expire at the end of this year, and many believe that the next person in line for the powerful position is somebody named Paul Ryan (R-WI). 
 

 

"Put yourself in the shoes of Paul Ryan," Bartlett suggested. "Do you really want to help Dave Camp pass tax reform when you might, instead, want to put your name on the next major piece of tax legislation? Put another way, do you want the final legislation to be called the Camp-Baucus bill, when instead it might be called the Ryan-Wyden bill?"
 

 

At the same time, the Senate Finance Committee is now chaired by Sen. Max Baucus (D-MT), who has announced his retirement. Standing next in line is Sen. Ron Wyden (D-OR)--who happens to have his own tax reform proposal. Bartlett suggested that Wyden is not inclined to help the tax reform process this year, because, like Ryan, he would like his name on the final piece of legislation.

 

 

Is this the way Congress is supposed to work? Obviously not. But Bartlett told the professional audience that we shouldn't look for a meaningful effort to simplify the tax code until soon after the 2016 Presidential election, after two candidates have had a chance to debate various proposals before the American public.

 

 

The way things are going now, that could be several debt ceiling debates from where we stand today.
 

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

   http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.


 

Sources:

www.bobveres.com, Inside Information

http://money.cnn.com/2013/02/05/news/economy/biggest-tax-breaks/

 

 

 

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688 Hits

A Collective Yawn

 

October 21, 2013
 

 

The stock market reaction to the 16-day government shutdown and threat of a default on all U.S. government budget obligations (Social Security checks, interest payments on government bonds, payments under contract to suppliers and contractors, etc. etc.) was stunningly mild. In fact, despite all the dire warnings and hints from the Democratic side of the aisle that the markets should send a loud message to the Republican party, they never did. Investors, for the most part, saw the whole shutdown/default charade for what it was: something that a majority of our elected representatives would eventually have to decide to work out. 
 

 

Indeed, over the 16 day shutdown, the markets actually went up. Compared with the naked fear that the Fed would stop intervening in the bond markets, the response to closing down the largest payroll on the planet and threatening to send the global economy into a tailspin registered not even a yawn.
 

 

Nevertheless, there were costs involved. The Standard & Poor’s organization recently calculated that the shutdown cost the U.S. economy $24 billion--or about $1.5 billion a day. An estimate from Moody's Analytics similarly put the figure at $23 billion--and this doesn't count lost productivity. Hundreds of thousands of furloughed government workers are going to be paid for their two-week-and-two-day vacation even though they did nothing productive. All those tourists who would have visited national parks and purchased hotel rooms and restaurant meals didn't. The ripple effect of thousands of government contractors twiddling their thumbs hopefully is hard to calculate. 
 

 

Perhaps the biggest cost, if we ever get a final tally, will be the interest the U.S. government has to pay on its debt. Bond dealers were reporting weak demand for Treasury bonds at auction across the full spectrum of maturities in October, as investors demanded higher yields to cover the threat of default. Since the recent budget deal only lasts until January 15, and the debt ceiling will be again breached on February 7, 10-year government bond holders could conceivably be looking at ten more opportunities for default before they get their money back.
 

 

The U.S. and world markets rose on the news that the government standoff had ended, but that doesn't rule out a pullback at some point in the near future. Eventually, investors are going to realize that shutdown and default debates could become an annual event. This is ironic, because, absent the squabbling in Washington, the U.S. economy seems to be healing nicely--if not quickly. Just before its staff was sent home for the shutdown holidays, the Federal Reserve Bank of Chicago released its latest report on the state of the economy, saying that consumer spending continues to increase, business spending is up and manufacturing activity has expanded. Most economists on the talking circuit these days seem to expect that the U.S. economy will show 2% growth for the year, down from closer to 3% estimates before the shutdown.
 

 

As always, we will continue to follow the debt ceiling issue and keep you posted. 
 

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

   http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

 

Sources:

www.bobveres.com, Inside Information

http://federalreserve.gov/monetarypolicy/beigebook/beigebook201310.htm

http://www.bloomberg.com/news/2013-10-15/treasuries-fall-after-officials-cite-progress-on-budget-deal.html

http://finance.yahoo.com/news/us-government-opens-avoids-default-130409012.html

http://gma.yahoo.com/blogs/abc-blogs/costs-government-shutdown-104753701--abc-news-politics.html

 

 

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Shutdown? Default? Consequences?

 

October 8, 2013
 

 

It's possible that you've heard a news report or two about the government shutdown that started October 1, and now a dispute over raising the U.S. debt ceiling and possibly defaulting on the government's debt obligations as soon as October 17. The question for an increasingly nervous investing public is: how will this affect the U.S. economy and (not to be too selfish here) my retirement portfolio?
 

 

Interestingly, it is starting to look like the government shutdown, if it runs for weeks instead of months, might have almost no effect on the economy at all. Why? The economic impact that had economists worried was the loss of income suffered by tens of thousands of federal employees. But the Defense Department has continued paying all of its civilian personnel, simply by declaring all of them "essential employees." Not only were the leaders of the House of Representatives not inclined to argue; they have quietly passed legislation that would give back-pay to all federal workers who have been furloughed, just as soon as the stalemate ends. The Senate and the President are likely to go along, giving the country the worst of all worlds: paying most government employees for staying home and not providing a wide variety of services to the public.
 

 

Ironically, the way the politics are working, one can almost be certain that there will be some kind of a stock market selloff before the shutdown ends. For the Republican leaders in the House, there is little cost to holding their ground as long as there is not a public outcry and loss of voter confidence. One of the sources of that pain would be a big drop on Wall Street. Indeed, if you listen closely to the speeches by President Obama and the Democratic leadership, you hear dire warnings of the risk of a market drop as a result of the shutdown--which is their way of focusing the public's attention on whom to blame when it happens. 
 

 

What is interesting is that the markets often deliver corrections after long, accelerating uptrends. It wouldn't have surprised anyone to see some kind of a quick downturn this Fall regardless of whether the government was operating at full capacity or at a standstill. A week of small leaks in stock prices could lead to something larger as people have no idea what Congress will do next. The last time the government was shut down, stocks dropped 20%, the Republican leadership realized it wasn't winning any popularity contests and the stalemate ended. We've seen this script before.
 

 

A more consequential issue is the debt ceiling. Congress must raise the total amount that the U.S. government can borrow (by selling Treasury bonds) to pay its various obligations, including, of course, interest on its current Treasury bonds. Contrary to popular belief, raising the debt ceiling does not increase the federal debt; that debt exists whether or not Congress authorizes additional borrowing.
 

 

Failure to authorize the government to pay its legal obligations would create a self-induced fiscal crisis--ironic for a country whose representatives claim that they never want to become another Greece, and then talk about voluntarily defaulting on the nation's debt obligations, which even Greece has avoided.

 

 

One recent article suggested that a default on Treasuries would ripple through the global economy, causing anxious investors to demand higher interest rates and dramatically raising U.S. borrowing costs. That, in turn, would raise rates on mortgages, credit cards and student loans, pushing the U.S. toward recession and putting pressure on the stock market. One report suggests that if the U.S. misses just one interest payment, the downward impact on stock prices would be greater than the Lehman Brothers bankruptcy. In THAT aftermath, the stock market lost half its value.
 

 

Bigger picture: a default would undermine the role of the U.S. in the world economy.
 

 

The irony of the debt ceiling debate is that the gap between government spending and tax revenues has been closing rapidly on its own. In July, the Congressional Budget Office reported that the deficit had fallen by 37.6%, the result of tax increases and sequester-related cuts in spending. As a percentage of America's GDP, the deficit has fallen from more than 10% at the end of 2009 to somewhere around 4% currently. Last June, the government actually posted a surplus of $117 billion, paying down the overall deficit, and the Congressional Budget Office has projected that September will also bring a government surplus.
 

 

Most observers seem to think that all of this will get worked out. After all, what rational person--in Congress or elsewhere--wants to self-impose these problems when we have plenty of economic challenges already? The stock market's calm trading days tell us that investors expect a compromise on the government shutdown in the near future. It may take a sharp day of selling to prod Congress off the dime. Foreign investors are still lending to the U.S. government at astonishingly low interest rates (despite modest increases over the past week), which tells us they aren't worried about a default.
 

 

The last time we went through this, the stock market plunges proved to be buying opportunities for investors. One of the great things about uncertainty and volatility is that it causes investments to periodically go on sale, and creates such anxiety that only disciplined investors are able to take advantage. There's no reason to think this isn't more of the same.
 

 

We continue to watch closely. Stay tuned.
 

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

   http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

 

Sources:

www.bobveres.com, Inside Information

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/06/maybe-the-government-shutdown-wont-clobber-the-economy-after-all/

http://www.cbsnews.com/8301-505123_162-57606253/debt-ceiling-understanding-whats-at-stake/

http://krugman.blogs.nytimes.com/2013/08/13/what-people-dont-know-about-the-deficit/

http://www.moneynews.com/newswidget/default-Catastrophe-lehman-demise/2013/10/07/id/529564?promo_code=125A8-1&utm_source=125A8Moneynews_Home&utm_medium=nmwidget&utm_campaign=widgetphase1
 

 

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The Government Shutdown

 

October 2, 2013
 

                       

As you have no doubt heard, the United States government shut down at midnight (Eastern) October 1, 2013. There are many questions and concerns about this situation, but here are some basics.
 

 

What happened? In short, Congress did not pass any of their appropriations bills. These bills provide money to various federal agencies. Federal law requires agencies without these funding laws in place to close.1
 

 

How long will this last? As with other shutdowns, this is largely up to the two major parties and their abilities to reach whatever deal is necessary to get the bills passed. If we look to history, the two most recent government shutdowns happened in the Clinton administration. One only lasted five days. The other lasted three weeks.1
 

 

What’s closed, what’s open? Not every public service is shut down entirely, as not every agency requires appropriations to function. Social Security and Medicare are not affected, active duty military will continue to function, as does the Department of Defense, intelligence, law enforcement, and our embassies overseas. Some are only partially closed; U.S. Courts will be open for 10 days, for instance.1,2
 

 

CNN has a frequently updated list of shutdowns at: http://www.cnn.com/interactive/2013/09/politics/government-shutdown-impact/index.html?iid=article_sidebar
 

 

How is this different from the debt crisis? They are different situations, but one can affect the other. With the shutdown a fluid situation, it’s difficult to say when this will be resolved. Whether you are a government employee or an ordinary citizen, it’s only natural to be concerned. If the shutdown drags on, it will start to shake consumer and business confidence.
 

 

The debt crisis relates to the separate matter of establishing how much money the U.S. Government can borrow in order to fund its various agencies and programs. However, Treasury Secretary Jack Lew says that the crunch is coming soon – no later than October 17.4  The brewing fight over raising the debt ceiling is actually a much bigger threat to the economy and the markets than the shutdown.
 

 

Overall, we expect this shutdown to be resolved and the debt ceiling to be raised – but politics will likely cause volatility in the markets. We will be watching the situation closely.  As always, call with any questions.  
 

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA
 

 

   http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 



This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. 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 - latimes.com/nation/politics/politicsnow/la-pn-government-shutdown-q-and-a-20130930,0,5564531.story [9/30/13]

2 - cnn.com/interactive/2013/09/politics/government-shutdown-impact/index.html?iid=article_sidebar [10/1/13]

3 - businessinsider.com/government-shutdown-debt-ceiling-obamacare-2013-9 [9/30/13]

4 - money.cnn.com/2013/09/25/news/economy/debt-ceiling-lew/index.html?iid=EL [9/25/13]
 

 

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Navigating the New Health Insurance Environment

 

September 20, 2013
 

 

This is a long newsletter, but we do believe it’s worth reading to give you a comprehensive understanding of what you need to know about Obamacare…which is right around the corner!
 

 

The brave new world of health care in the U.S. is about to arrive.   The most far-reaching provisions of the Patient Protection and Affordable Care Act--sometimes known as "Obamacare"--will debut on October 1 of this year, when the new health insurance marketplaces (aka "exchanges"), will open for enrollment. The coverage on these plans will start as soon as January 1, 2014, at which time just about everybody (with some interesting exceptions) will be required to have a health insurance policy in place or face tax penalties.
 

 

For most of us, this is going to be a dramatic and confusing transition period. Here are answers to some of the most frequently-asked questions about the exchanges, coverages and new tax law.
 

 

Will this make shopping for health insurance easier or harder?
 

 

Theoretically, it should be much easier--for four reasons. First, all the policies offered in your area--with prices and policy provisions--will be listed side-by-side on the exchange website. (See below for links to these sites.) Before, this "total market" information was available only to health insurance agents.
 

 

Second, you don't have to search high and low for a policy that allows coverage of your pre-existing conditions, or go through a lot of medical underwriting where the insurance company would look for reasons to charge you more or deny you coverage altogether. Private insurers who participate in the network cannot turn you away or charge you more because you have an illness or preexisting medical condition--and they must cover treatments for those conditions.
 

 

Third, the policies are now somewhat standardized into four categories, making the comparison of features much less complicated than before.
 

 

And fourth, theoretically, the competition should help drive insurance premiums lower. If one company is offering a better price on a particular policy than all the others, and raking in all the business as a result, other insurance companies will be motivated to drop their prices to be competitive. This isn't a guarantee of lower premiums. Initially, some insurance companies will set higher prices until they can get a better handle on claims experience. Some will be worried that so many people with big health problems will sign up that it will overload the system and could lead to higher premiums. But over the long haul, insurance company profits hopefully should be lower than they were before.
 

 

Are these plans run by the government?
 

 

No. They are offered by private insurance companies.
 

 

What's different about the policies offered through the exchanges, compared to what I'm used to?
 

 

The biggest change is the fact that there is no underwriting or additional charges (or denial) due to pre-existing conditions. The second-biggest is that the plans will be somewhat standardized, which makes it a little bit less complicated to comparison shop. 
 

 

Beyond that, all plans are required to cover a core set of benefits, called "essential health benefits," including preventive and wellness services, chronic disease management, pediatric services, many prescription drugs, rehabilitative services if you get injured, mental health and substance disorder services, maternity and newborn care, hospitalization and emergency services. 
 

 

Unlike the previous environment, no plan will be allowed to have deductibles, co-payments or co-insurance greater than the limits for high-deductible plans (roughly $6,000 for an individual, $12,000 for a family) or impose a limit on lifetime healthcare benefits.
 

 

Finally, under the exchange system, women cannot be charged higher health insurance premiums than men.
 

 

So what are the differences between the policies that I'll be choosing from?
 

 

There will be four basic levels (meaning costs) of policies, which have been dubbed bronze, silver, gold and platinum. 
 

 

If you are not a frequent visitor to the doctor, you might prefer the least expensive option: a bronze plan, which will cover 60% of all health care costs for the average person, leaving you to pay 40%, overall, out-of-pocket. 
 

 

A silver plan covers, on average, 70% of a policyholder's healthcare costs, a gold plan covers 80% and the platinum plan, for people who are frequent medical consumers and can afford the cost, covers 90% of medical expenses, leaving you with 10% out-of-pocket.
 

 

Young adults under the age of 30 will be able to purchase a catastrophic plan, where they would pay the out-of-pocket costs for all health services except preventive services up to an annual limit of $12,700 (in 2014, rising with inflation thereafter).
 

 

Suppose I have an HSA plan and make tax-deductible HSA contributions to pay for my health care?
 

 

A lot of shrill articles on this subject declared HSA plans null and void under the new health reform regime. But they may have overlooked a provision in the new law that clearly states that people using the HSA strategy on or before March 22, 2010 will be grandfathered. Unless they make a major change to their plan that would cancel their grandfathered status, they can continue their HSA strategy indefinitely.
 

 

Meanwhile, recent calculations appear to allow federally-qualified HSA plans with the highest deductibles (around $6,000) to meet the standards for bronze coverage. Basically that means that, with some tweaking of existing policies, you will probably be able to continue to buy high-deductible catastrophic care insurance through the exchange and continue to make those tax-credited contributions and get tax-deferral on the money invested in the HSA account.
 

 

However, the Affordable Care Act made one significant change to how HSAs work: the law eliminated the ability to use money in the HSA account to buy over-the-counter drugs. You don't want to make this mistake and write a check to the pharmacy for the drug purchase. The early withdrawal penalty for taking money out of the account for reasons other than to pay medical bills, for anybody under age 65, is 20% of the withdrawal amount. Add in the tax penalties and that bottle of aspirin can get very expensive.
 

 

How do I compare the plans and buy them?
 

 

You will be able to compare plans (and, most importantly, costs) side-by-side on the web portal of your state exchange--or, if your state has not created an exchange, then through a federal web portal (see below). There will also be toll-free consumer assistance hotlines that can be found on the exchange website.
 

 

When you apply for coverage in the exchange, you'll need to provide your Social Security number, the name of the employer of each member of your household who needs coverage and their income, plus the policy numbers for any current health insurance plans covering members of your household. You will also need to provide information on any health insurance policy you and/or a member of your household is eligible for, even if you aren't currently participating in the plan.
 

 

What else should I be comparing?
 

 

Look at whether the plan lets you visit the doctors and hospitals with whom you are currently comfortable. Many of the policies are going to be network-dependent; a fancy word that means you will be confined to working with their preferred provider professionals and facilities.
 

 

How workable is this exchange idea, anyway?
 

 

There have been a lot of commentaries on both sides of the political spectrum, which might lead you to believe that the exchange concept was conceived in heaven or hell. But one thing to remember is that Medicare has operated as an exchange (although it isn't called that) for decades. Each Medicare-eligible person picks from a number of plans, more in some states than in others, each with a variety of benefits. So to the extent that seniors are happy with their Medicare coverage, there is at least one significant example that the concept can work effectively.
 

 

Of course, consultants will tell you that most seniors tend to pay more in out-of-pocket expenses under Medicare than necessary, because they don't know how to match up their personal health profile with the right package. That may also prove to be true with the exchanges.
 

 

Which states have their own state exchanges?
 

 

You can put in the name of your state on a very helpful website set up by the government: www.HealthCare.gov, and get links to the state exchanges--plus a lot of other explanatory information.
 

 

Exchanges have been set up in:

 

California (Covered California; http://www.coveredca.com/),

Colorado (Connect for Health Colorado; http://www.connectforhealthco.com/),

Connecticut (Access Health CT; http://www.accesshealthct.com/),

The District of Columbia (DC Health Link; http://dchealthlink.com/),

Hawaii (Hawaii Health Connector; http://www.hawaiihealthconnector.com/),

Idaho (Your Health Idaho; http://www.yourhealthidaho.org/),

Kentucky (Kentucky Health Benefit Exchange; http://kynect.ky.gov/),

Maryland (Maryland Health Connection; http://www.marylandhealthconnection.gov/),

Massachusetts (The Massachusetts Health Connector; https://www.mahealthconnector.org/portal/site/connector),

Minnesota (MNsure; http://mn.gov/hix/),

Nevada (The Nevada Health Link; http://www.nevadahealthlink.com/),

New Mexico (The Health Insurance Marketplace; http://www.nmhix.com/),

New York (The New York State of Health; http://healthbenefitexchange.ny.gov/),

Oregon (Cover Oregon; http://www.coveroregon.com/),

Rhode Island (HealthSource RI; http://www.healthsourceri.com/),

Vermont (Vermont Health Connect; http://healthconnect.vermont.gov/) and

Washington (Washington Healthplanfinder; http://www.wahealthplanfinder.org/).

Utah has an exchange for small businesses and employees (Your Small Business Health Options Program; http://www.avenueh.com/) but if you want to shop for individual coverage in Utah, or any coverage in all other states, you go to the government's website at: http://www.HealthCare.gov.  

 

Am I required to buy one of those policies?
 

 

Yes and no. If you're covered by Medicare, Medicaid, TRICARE, the veteran's health program or a plan offered by your employer, then the requirement to have health insurance is satisfied. You are not required to buy health insurance if your family income is below $10,000 (individual) or $20,000 (joint).
 

 

Otherwise, the answer is still no, but you have to pay a tax penalty if you are not covered by health insurance. 
 

 

What kind of a penalty?
 

 

In 2014, that penalty is $95 per adult and $47.50 per child up to $285 for a family, or 1% of family income above the aforementioned thresholds ($10,000 or $20,000)--whichever is greater. For a family with more than $900,000 in income, the penalty will be higher than the cost of a typical silver-level plan; below that, the decision not to be covered becomes more complicated.
 

 

The penalty steps up in subsequent years. In 2015, it jumps to $325 per uninsured adult and $162.50 per uninsured child, up to $975 for a family, or 2% of family income above the thresholds--whichever is greater. In 2016 and thereafter, the penalty steepens to $695 per uninsured adult, $347.50 per uninsured child or 2.5% of family income above the thresholds. In all cases, the penalty is prorated by the number of months without coverage.
 

 

How will the government know whether I have health coverage?
 

 

Health insurance plans will provide documents to the people they insure, that will be used to prove they have the minimum coverage required by law.
 

 

Would it make sense to drop the coverage I get from my employer and buy one of these new policies?
 

 

It depends on what you're paying now, and what you're getting--but in most cases, the answer is no. In most job-based health insurance plans, your employer pays a portion of your premiums. If you choose a plan from the exchange, your employer does not need to make a contribution to your premiums. Your employer should be providing you with information about Obamacare and how your employer plan meets the requirements prior to October 1, 2013.
 

 

Does the government subsidize some of the cost of health insurance premiums? If so, for whom, and how much?
 

 

An estimated two-thirds of the American population will receive some form of subsidy. You qualify if your income is under four times (400%) the federal poverty level--which is about $88,000 a year for a family of four. If the family income falls under 250% of the federal poverty level ($27,000 for an individual; $55,000 for a family of four), then that family is eligible for "cost-sharing credits" which help defray co-payments, co-insurance and deductible--plus premium assistance on the policy itself. Above that 250% threshold, up to 400%, families are eligible on a sliding scale for premium assistance.
 

 

The Kaiser-Permanente organization has created a calculator telling you what credits and assistance you qualify for: http://kff.org/interactive/subsidy-calculator/. A family of four with two children, where nobody uses tobacco, earning $90,000 a year in 2014 dollars (382% of the poverty level), falls right on the threshold. An unsubsidized silver plan would cost $9,869, but the rules only require a person in this income category to pay a maximum of 9.5% of income for health insurance, so the government will issue a tax credit of $1,319 a year, dropping the actual premium price to $8,550.
 

 

The same household with an income of $50,000 is only required to pay 6.73% of its income, which means it would receive a government subsidy of $6,504--66% of the total premium expenses.
 

 

All subsidies are based on the premium for the silver plans. If an individual receiving the subsidy wants to purchase a gold or platinum plan, he or she will need to pay the difference between the premium credit amount and the cost of the more expensive plan.
 

 

When should I do my insurance shopping?
 

 

Sooner is better than later. As the January 1 deadline approaches, you can expect that suddenly many millions of people will suddenly decide they had better get coverage. The result could be a lot of confusion around the end of the year that you would be better off avoiding.
 

 

We hope this answers some of the many questions out there surrounding Obamacare. As you can see, much of this new process will be learn-as-you-go. We will do our best to continue to keep you informed.
 

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA
 

 

   http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

 

Source: 

Bob Veres, Inside Information

 

 

 

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The Value of Underperforming Assets

 

September 12, 2013
 

 

Chances are you've noticed that the U.S. stock market has offered nice returns over the past several years. Then you look at the money invested in international equities, bonds, and just about any other sector you could name, including emerging markets, and it looks like they were holding you back. 
 

 

Didn't you lose money not being in U.S. stocks all that time?
 

 

Surprisingly, the answer is no. In fact, a recent article in the Journal of Financial Planning offers a neat illustration showing why diversifying in a variety of assets--even though some inevitably underperform others--can actually raise your total portfolio returns over the longer term.
 

 

The article starts by pointing out the fact that positive and negative returns are not equal. For small losses, they're close: a 10% decline requires an 11% gain in order to get back the money you lost. If you lose 20%, you have to gain back 25% before you have what you had before the market took a bit out of your portfolio. 
 

 

But what if you lose 30%? Now you have to get back 43% in order to have what you started with.

 

 

Lose 40% of your portfolio value, and you aren't whole until you get a whopping 67% return on the remaining assets. Lose 50% and, of course, you need a 100% return to get back to where you were. 
 

 

The point? If diversification minimizes extreme portfolio movements in either direction, it can lead to greater wealth creation--just because of the mathematics of gains and losses.
 

 

To illustrate this, the authors produced an interesting chart. They plotted the S&P 500's returns from mid-1993 through mid-2013, which includes the thumping, roaring bull market of the later 1990s and two rather nasty market pullbacks. Then they assume that somehow you would be able, via a broad asset mix, to reduce the downside by 50% and also give up 50% of every upside in the index--an even trade, right?

 

 

In fact, this strategy doesn't look so great during the booming late 1990s, when the "tempered" index returns fell behind the market returns. But over time, due to its outperformance during market busts, the tempered market returns produced more terminal weal th than the index itself.

 

 

Then the authors looked at what would happen if an investor did what many investors today are probably thinking about doing: abandoning those tempering, underperforming "other" investments and going all in on U.S. stocks. They create a hypothetical investor named "Dick" who became very impatient watching his tempered portfolio underperform the index for the first seven years of the chart as the bull market roared through the investment world. So he made a bold decision: Banish diversification! Full speed ahead with U.S. stocks! He switched to the U.S.-only portfolio, and, as you can see on the graph, he has underperformed ever since. 
 

 

 

The moral of the story – continue to globally diversify your portfolio and use many different asset classes. Be patient, you are invested for the long term.
 

 

If you haven’t already, we encourage you to read our last newsletter about Diversification: Slow and Steady to your Goal at the following link: http://www.kohlheppadvisors.com/pages/kohlheppUpdate.aspx?LinkID=124814&spid=135200
 

 

As always, call us with any questions or concerns.
 

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

 http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

 

Sources: 

Bob Veres, Inside Information

http://www.fpanet.org/journal/RiskManagementasAlphaGenerator/

 

 

 

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THE GREAT DISCONNECT

 

August 28, 2013

 

We are confused! That was our first reaction when we saw the performance numbers for the U.S. stock market for the first six months of the year and compared it to that of our portfolios. So we dug deeper and this is what we found:



 

 

Per the chart above:     

U.S. Equities                            +14.1%

            Non U.S. Equities                     + 3.1%

            Emerging Market Equities         - 8.0%

            U.S. Bonds                              - 2.4%

            REITS                                      + 2.0%

            Commodities                            -10.5%

 

Now check this out:
 

            A BALANCED INDEX PORTFOLIO            +2.1% (royal blue on chart)

 

So, during the first six months of 2013 you were “penalized” for having a “balanced” portfolio. Crystal ball gazers and cable TV pundits would have had you invested 100% in the U.S. Equity market this year. However, neither we, personally, nor any of our clients are ever invested 100% in U.S. equities.

 

Had you done this you would have been taking full market risk and exposing yourself to the full market downside when (not if) it occurs. So we emphasize diversification across many markets and many asset classes because this provides significantly less risk, with smoother and better risk adjusted returns. As you can see, the chart shows that over the 10 year period ending June 30, 2013,  a Balanced portfolio showed an average annual return of 6.9% vs. 7.8% for the all U.S. equity portfolio.

 

During the last few weeks for the stock market the road has gotten bumpier as we have recently seen seven straight days of losses on the Dow. The bond market has suffered losses since early May as the 10 year Treasury bond has seen its yield rise from 1.5% to almost 2.9%, and as interest rates rise, bond values drop.

 

What should we do now?

 

We are entering a difficult time in the markets. We still believe in global diversification. You should never “chase” the winning asset class, which so far this year has been U.S. Equities.

 

Don’t totally abandon bonds. Bonds will most likely stabilize between now and the end of the year. When interest rates rise over the next few years, as is likely, bond managers can adjust their portfolios. Therefore, bonds can still mitigate risk.

 

As we meet with each of you we will be introducing additional “alternative” investments which are not correlated with either the stock or bond markets. This will further mitigate risk in your portfolio.

 

Remember, the most important issue is that you are on track to meet your goals, not your performance relative to the markets. Don’t let short-term returns potentially dictate long-term investment decisions.

 

We will be in touch further as we navigate these turbulent times.
 

Enjoy the rest of the summer!
 

Sincerely,

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA
Edward J. Kohlhepp, Jr., CFP®, MBA


   http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600


Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.


Investment Advisory services offered through Kohlhepp Investment Advisors, Ltd., a federally registered investment advisor. Securities offered through Cambridge Investment Research, Inc., a Registered Broker/Dealer, member FINRA/SIPC. Kohlhepp Investment Advisors, Ltd. and Cambridge Investment Research, Inc. are not affiliated.

 

Source: Russell Investments

 

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A Long-Awaited European Recovery?

 

 

August 16, 2013

 

You may be enjoying this long respite from reading about the European debt problems, which just a year ago still scared many observers into thinking that the world was on the edge of a deep economic malaise. The last time Europe made headlines, Greece was going bankrupt, France had its pristine AAA credit rating downgraded, Spain was wrestling with unemployment north of 20%, Italy was insolvent and everybody south of Germany was mired deep in economic recession.
 

 

So where are we now? The Financial Times of London recently took a hard look at the current situation in Europe, and found that the reports of Europe's demise may have been exaggerated. In fact, the Eurozone's gross domestic product data was just released showing positive figures after 18 months of gloomy negative growth rates (initial reports show 0.3% growth in Q2).
 

 

Among the hopeful signs: manufacturers in the 17 countries that use the euro currency have reported their biggest increase in output since 2011, and Greece, the epicenter of the original crisis, has qualified for its next batch of rescue loans totaling 5.8 billion euros as it sells off (or privatizes) government-owned corporations to pay its debtors. Spain's unemployment rate has recently fallen for the first time in two years and even troubled Portugal, where political opposition to austerity threatened its ability to receive a global bailout, now seems to be back on the tracks of economic reform. Perhaps the best news is that France's finance minister recently announced the end of recession in the Eurozone's second-largest economy, with second quarter 2013 growth of 0.2%.
 

 

Of course, there are still problems that could derail this still-fragile recovery. Perhaps the biggest is the continent's banking industry, where banks are still avoiding having to fess up to their losses on sovereign debt, still cleaning up their balance sheets and are slow to make much-needed loans to regional businesses. Greece and Spain are still burdened with 27% jobless rates, and Italy is still mired in recession after a 2.4% GDP decline in 2012. 
 

 

Those of us who have read more about the Greek economy can finally dare hope that the break from scary headlines continues. Interestingly, most of the reports that talk about rays of hope in Europe also mention, in passing, that the U.S. economy has been the sole engine of growth in an otherwise troubled global economy. That, in itself, is something to cheer about.


Enjoy this beautiful weather as the summer comes to a close!

 

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

 http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.


 

Sources:

Bob Veres, Inside Information

http://www.ft.com/cms/s/0/80504532-00e6-11e3-a90a-00144feab7de.html#axzz2bbpzTv8i

http://www.theguardian.com/business/2013/jul/25/spain-unemployment-falls

http://www.skynews.com.au/businessnews/article.aspx?id=893707

http://www.euronews.com/2013/07/22/portuguese-political-crisis-cooled-but-not-cured/

http://www.cnbc.com/id/100893323

http://www.cnbc.com/id/100951335


 

 

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Is Detroit's Bankruptcy Just the Beginning of a Bigger Problem?

 

 

July 26, 2013
 

 

You've probably read that the city of Detroit has filed for bankruptcy protection. If you're like most Americans, you assumed that this is because the city has been declining, economically for decades. And indeed it's true that America's 18th largest city, once the 4th largest, has seen its population fall by 1.3 million people, leading to a 40% aggregate drop in tax revenue despite property taxes that are now twice the national average. Detroit's unemployment rate is more than double the U.S. average--a situation which is unlikely to slow the exodus.
 

 

But Detroit's fiscal problems actually have little to do with its woeful economy. The problem lies in the assumptions that the city made about future returns in its investment portfolio--the portfolio that funds all city pensions and retirement benefits. With the benefit of hindsight, it is clear that these assumptions were disastrously off-kilter. Recent estimates say that the discrepancy between what the city has promised to its current and retired employees, and the money the city has to pay for those promises, could be anywhere between $3.5 billion and $9 billion dollars. 
 

 

Here's the punchline: the calculations that Detroit's municipal authorities relied on to say that they were perfectly solvent follow generally accepted actuarial principles. Many other cities and states appear to be making the same mistake, and it's perfectly legal.  

 

 

Without getting too deeply into the complicated math, the bottom line is that the city has been assuming that its portfolios would generate a steady return of between 7% and 7.5% at least since the turn of the century. In 2011, as the city's financial picture worsened, its pension fund managers increased their projections of future investment returns to 8%, which made the pension system seem potentially better-funded in future years. 
 

 

Why is this a problem? If you've ever happened to glance at your own portfolio statements, you may have noticed that no conservatively-managed investment portfolio has earned anything close to 7% a year since 2000. But Detroit's actuarial team accounted for that by "smoothing" the projections--a fancy way of saying that they assumed higher returns in the future would offset the lower returns they'd experienced.
 

 

These assumptions had two highly-desirable results: they allowed the city to make much smaller contributions to the pension fund than would have been necessary with more realistic investment projections, and they allowed the city to promise future retirement (income and healthcare) benefits that were much more expensive than the city could actually afford.
 

 

The problem is that Detroit is not alone.

 

 

It doesn't take a rocket scientist to notice, as a writer did recently at The Economist magazine, that the New York City public school system account statements show a yearly return on teacher annuities that is six percentage points higher than the highest going rate on bank savings accounts. New Jersey recently cut its investment projections to 7.9 percent, a mere .10% less than Detroit. Over the past ten years, the giant California pension, Calpers, has been using various smoothing techniques to give its municipalities the illusion of greater solvency. Some states and cities, when they post job listings for staff actuaries, require that the potential hires hew to the generally-accepted principles. No sober doses of reality will be sought or tolerated.
 

 

Why hasn't anybody blown the whistle on this long-term overstatement of returns and understatement of liabilities? Who benefits from putting that whistle to their lips? The city employees, whose monthly statements show returns and benefits that are orders of magnitude higher than they could get in the open market? The city officials, who would then have to deal with the scandal of underfunding and have to make huge tax dollar commitments to catch up, often with money they don't have? The municipal bondholders, who are clipping coupons and whistling in the dark, hoping they'll be paid off before somebody tells them, as Detroit bondholders are now being told, that their investment is worth pennies on the dollar? 
 

 

Taxpayers, who could be on the hook for billions of dollars worth of promises that the state constitution and city charter declare must be kept?
 

 

In fact, the New York Times recently reported that the Society of Actuaries itself is revisiting its generally accepted principles, fearing a black eye for the profession. The debate could lead to a policy that favors more realistic investment assumptions, while officials running for office may have uncovered the next scandal that could shoo them into office.
 

 

Either way, you can expect to hear more about bankrupt cities and municipalities, and the next headline probably won't be about a city whose population has been declining since the Eisenhower Administration. How far and how deep this readjustment will go, how much has been overstated across millions of workers and hundreds of thousands of retired municipal workers, is a potentially alarming mystery.
 

 

This is just the beginning of a major “pension crisis” in our country!

 

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA


 

 http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

 

Sources:

http://www.realclearmarkets.com/articles/2013/07/24/the_real_message_behind_detroits_decline_100499.html

http://www.irishtimes.com/business/economy/detroit-bankruptcy-filing-comes-after-long-financial-decline-1.1469526

 

http://www.economist.com/blogs/democracyinamerica/2013/07/detroit-s-bankruptcy

 

http://dealbook.nytimes.com/2013/07/19/detroit-gap-reveals-industry-dispute-on-pension-math/?ref=marywilliamswalsh

 

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7 Lessons from the Fourth of July

 


The American Revolution was a gambit underpinned by iconoclastic ideas, unwavering principles, and tenacious effort. This July Fourth, let the example of the founding patriots inspire you to your own success.
 

 

“Nothing important happened today.”

—Diary entry by King George III on July 4, 1776
 

 

Ah, George. Little did he know what was brewing across the Atlantic on that fateful day.
 

 

For most of us, the Fourth of July promises the opportunity to relax, a few days on which to do precisely “nothing important.” It’s a time for sizzling burgers on the grill, spiking volleyballs at the beach, and shouting our approval as fireworks blast colorful patterns in the night sky. 


 

There’s nothing wrong with taking advantage of a well-earned day off and relaxing with family and friends. But there are lessons to be learned from Independence Day, great lessons that  underscore the courage and commitment upon which this country was founded—lessons about success.
 

 

When it comes to motivation and training, you’ll often hear advice thrown about, such as “Be a leader,” “Act decisively,” and “Never give up.” We’ve heard these ideas so often, they’ve become clichés that have lost some of their meaning. So let’s use this July 4 as the perfect time to look at such advice operating in a revolutionary context.
 

 

Here are just seven of the lessons the founding citizens of this country can still teach us today:
 

 

1. A lesson in boldness

“Gentlemen, I make the motion that these United Colonies are, and of right ought to be, free and independent States, that they be absolved from all allegiance to the British Crown, and that all political connection between them and the state of Great Britain is, and ought to be totally dissolved.”
 

 

The delegates of the Second Continental Congress in Philadelphia were stunned by these words from Richard Henry Lee. The war had commenced with the battles of Lexington and Concord the previous year, but since then events had progressed far beyond addressing colonial grievances. The delegates were now considering the mind-boggling audacity of pursuing complete independence from King George III. In the 18th century, that was the type of talk that led right up the creaky steps to the gallows.
 

 

But nevertheless, in full consciousness of the risk they were taking, in the summer of 1776, 56 prominent men from throughout the 13 colonies affixed their signatures to the Declaration of Independence, which was adopted by the Congress on July 4. “We must all hang together, or assuredly we shall all hang separately,” Ben Franklin famously said. The actions of these men—all of whom had much to lose—is the very definition of boldness.
 

 

We might ask of ourselves, “Where is our resolve, our boldness to dream and demand change? What do we believe in?”
 

 

2. A lesson in honor

Long before the image of Samuel Adams was pasted onto a bottle of beer, the man himself had failed as a brewer and dedicated himself instead to politics. A skilled writer and pamphleteer, he was responsible for stoking the fires of rebellion among the colonists. The crown was well aware of Adams’s growing influence and attempted to neutralize the outspoken patriot with the methods that tend to break most men: intimidation and bribery.
 

 

Massachusetts Governor Thomas Gage dispatched Colonel Fenton to personally “persuade” Adams to cease his revolutionary activities. As you’re sipping a Sam Adams Summer Ale over the holiday, consider this remarkable exchange, as set forth in Think and Grow Rich, by Napoleon Hill.
 

 

Colonel Fenton: “It is the governor’s advice to you, Sir, not to incur the further displeasure of His Majesty. Your conduct has been such as makes you liable to penalties for which persons can be sent to England for trial for treason. But, by changing your political course, you will not only receive great personal advantages, but you will make your peace with the King.”
 

 

Samuel Adams: “Then you may tell Governor Gage that I trust I have long since made my peace with the King of Kings. No personal consideration shall induce me to abandon the righteous cause of my country. And tell Governor Gage it is the advice of Samuel Adams to him, no longer to insult the feelings of an exasperated people.”
 

 

OK, here we have Adams essentially telling the officer, the governor, and the King himself—the most powerful man on the planet—to take a royal hike. How many of us have such unshakeable principles, and the inner strength to back them up?
 

 

3. A lesson in communicating

Many of us lament the daily interruptions to our work from e-mail, faxes, and phone calls. We sometimes see these means of connection as little more than roadblocks to productivity. In the 18th century there was no Internet, and no fax machines or cell phones, but the leaders of the rebellion placed a high priority on staying connected and spreading the word. (“The British are coming, the British are coming”—does that pithy jingle ring a bell?)
 

 

One of the keys to the revolutionaries’ success against England’s might was their “mastermind alliance.” Patriots such as Ben Franklin tapped into the power and influence of collective  creativity by networking with other progressive-minded thinkers. They didn’t always agree on the details, but they did help one another toward their common goal: freedom from tyranny.
 

 

Adams organized the “committees of correspondence” along with John Hancock and Lee to pound the pavement and circulate news and information throughout the colonies via handwritten letters. The Boston Tea Party was such an effective publicity stunt–cum–political act that it inspired copycat events throughout the colonies. Paul Revere and two compatriots sped through the Massachusetts night to spread the alarm of British invasion. Thomas Paine’s pamphlet Common Sense was widely circulated and turned the tide of public opinion toward independence: No more technology than a printing press to that, but talk about an effective communication strategy.
 

 

What do we do to generate buzz and excitement about our ideas and beliefs? How willing are we to spread the word about the causes that we support?
 

 

4. A lesson in perseverance

Though independence was declared in 1776, it would take six trying years before the dream of freedom from English rule would be realized. During that time Washington would lose more battles than he’d win. His own men would border on desertion. His most valuable general and trusted friend, Benedict Arnold, would betray him and the cause. And of course, thousands of lives would be lost and untold property destroyed. There were many opportunities to give up. Arnold gave up. But Washington and his compatriots did not. Arnold took the path of less resistance. Washington and the others refused to be defeated by power and tradition. And it was they who changed the course of history.
 

 

How resilient are we in the face of obstacles? How do we deal with setbacks and hardship?
 

 

5. A lesson in sacrifice

Beyond the soldiers facing death on the battlefield, many other Americans helped bring the dream of July 4th to fruition, people who toiled behind the scenes, such as Abigail Adams.
 

 

While her husband, John, traveled and labored to build the fledgling state (as a circuit judge, delegate to the Continental Congress, envoy abroad, and elected officer under the Constitution), Mrs. Adams, like women throughout the colonies, oversaw the daily workings of the family farm, managed the finances, and raised and educated five children (including the future president John Quincy Adams).
 

 

Like most women of her time, Mrs. Adams had no formal schooling, so she educated herself. She became a prolific reader and letter writer, leaving behind a correspondence of some 2,000 letters that give us an window into how she viewed politics and society, her contributions to the war effort—and her station in life.
 

 

On the eve of independence, Mrs. Adams wrote to her husband: “I long to hear that you have declared an independency. And, by the way, in the new code of laws which I suppose it will be necessary for you to make, I desire you would remember the ladies and be more generous and favorable to them than your ancestors.”
 

 

How do we balance work, civic responsibilities, and family life? How do we redress the accepted infringements of liberty still present in our time?
 

 

6. A lesson in professionalism

While Thomas Jefferson has received the lion’s share of accolades for the Declaration, John Adams also served on the writing committee and was instrumental in bringing the Declaration about. Jefferson called Adams “the Colossus of that Congress—the great pillar of support to the Declaration of Independence, and its ablest advocate and champion on the floor of the House. “After the war was won, political differences caused these patriots-in-arms to become adversaries for many years.
 

 

But finally Jefferson wrote a letter to Adams, and the two renewed a friendship and  correspondence that lasted for the rest of their lives. Strangely enough, Jefferson and Adams both died on July 4. On July 3, 1826, Jefferson lay on his deathbed. Perhaps realizing the significance of passing on the 50th anniversary of his magnum opus, he uttered his last words to the attendant “This is the Fourth?” To comfort him, the man replied that it was, whereupon Jefferson smiled and fell into a sleep from which he would never awaken.
 

 

Adams had resolved to live until the 50th anniversary of the Declaration; when his servant asked him that morning if he knew the date, the 90-year-old said, “Oh, yes, it is the glorious fourth of July. God bless it. God bless you all.” Adams would die later that afternoon, with the final words “Jefferson still survives.” He didn’t know that Jefferson had died just a few hours earlier at Monticello.
 

 

How will each of us greet our last day? With the regret of unfinished business and unresolved conflict? Or with the pride of a life well led?
 

 

7. A lesson in legacy

One amazing aspect of the Declaration of Independence is that Jefferson’s words capture an idea and a spirit that predate them.
 

 

“But what do we mean by the American Revolution?” asked John Adams. “Do we mean the American war? The Revolution was effected before the war commenced. The Revolution was in the minds and hearts of the people.”
 

 

True, the notion of freedom lived in the hearts and minds of the colonists for a long time before it was finally committed to paper. But once written down, once codified in words, the idea gained clarity—and strength. Once written down, this touchstone of the democratic ideal could harness the power of the will of the people to be free.
 

 

Building on Thomas Paine’s Common Sense, the 33-year-old Jefferson drafted a document that became a powerful call to action, a blueprint that would not only inspire but support the hard work to come. He penned the ultimate mission statement of the country: “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”
 

 

Do we know what we are working toward in life? Do we know what legacy our work will leave for those generations that follow us? Do we have our own personal mission statement?
 

 

Have a happy and safe 4th of July and weekend!
 

 

Sincerely,

All of us at Kohlhepp Investment Advisors, Ltd.


http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600


Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives

 

Written by Edward E. Klink

 

Copyright © 2011 by Horsesmouth, LLC. All Rights Reserved. License #: 4251071-343316 Reprint Licensee: Edward J. Kohlhepp

IMPORTANT NOTICE This reprint is provided exclusively for use by the licensee, including for client education, and is subject to applicable copyright laws. Unauthorized use, reproduction or distribution of this material is a violation of federal law and punishable by civil and criminal penalty. This material is furnished “as is” without warranty of any kind. Its accuracy and completeness is not guaranteed and all warranties express or implied are hereby excluded.

 

Horsesmouth is an independent organization providing unique, unbiased insight into the most critical issues facing financial advisors and their clients. Horsesmouth was founded in 1996 and is located in New York City.

 

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Understanding the Gift Tax Exclusion

 

Most of us will never face taxes related to money or assets we give away.
 

 

June 2013
 

 

“How can I avoid the federal gift tax?” If this question is on your mind, you aren’t alone. The good news is that few taxpayers or estates will ever have to pay it.

 

 

Misconceptions surround this tax. The IRS sets annual and lifetime gift tax exclusion amounts, and this is where the confusion develops.

 

 

Here’s what you have to remember: practically speaking, the federal gift tax is a tax on estates. If it wasn’t in place, the rich could simply give away the bulk of their money or property while living to spare their heirs from inheritance taxes.

 

 

Now that you know the reason the federal government established the gift tax, you can see that the lifetime gift tax exclusion matters more than the annual one.

 

 

“What percentage of my gifts will be taxed this year?” Many people wrongly assume that if they give a gift exceeding the annual gift tax exclusion, their tax bill will go up next year as a result. Unless the gift is huge, that won’t likely occur.


 

 

The IRS has set the annual gift tax exclusion at $14,000 this year. What this means is that you can gift up to $14,000 each to as many individuals as you like in 2013 without having to pay any gift taxes. A married couple may gift up to $28,000 each to an unlimited number of individuals tax-free this year. The gifts may be made in cash, or they can be made in stock, contributions to 529 plans, collectibles, real estate – just about any form of property with value, as long as you cede ownership and control of it.1,2,3

 

 

So how are amounts over the $14,000 annual exclusion handled? The excess amounts count against the $5.25 million lifetime gift tax exclusion. While you have to file a gift tax return if you make a gift larger than $14,000 in 2013, you owe no gift tax until your total gifts exceed the lifetime exclusion.2,3

 

 

“Are gifts subject to income tax?” It is important to remember that cash gifts (or checks) are not subject to income tax. The donor does NOT get a tax deduction, and the donee does NOT have to include the gift as income.

 

 

“What happens if I go over the lifetime exclusion?” If that occurs, then you will pay a 40% gift tax on gifts above the $5.25 million lifetime exclusion amount. One exception, though: all gifts that you make to your spouse are tax-free provided he or she is a U.S. citizen. This is known as the marital deduction.1,2,3

 

   

“But aren’t the gift tax and the estate tax unified?” They are. The gift tax exclusion and the estate tax exclusion are sometimes called the unified credit. So if you have already made taxable lifetime gifts that have used up $3 million of the current $5.25 million unified credit, then only $2.25 million of your estate will be exempt from inheritance taxes if you die in 2013.3

 

 

However, the $5.25 million unified credit given to each of us is portable. That means that if you don’t use all of it up during your lifetime, the unused portion of the credit can pass to your spouse at your death. So if you only use up $1.25 million of your unified credit during your lifetime and your spouse has the full $5.25 million credit remaining, your spouse would have the chance to transfer as much as $9.25 million tax-free, either through gifts made during your life or after your death.3

 

  

In sum, most estates can make larger gifts during life without any estate, gift or income tax consequences. If you have gift tax, income tax or estate tax questions, please give us a call.

 

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

 http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

  

 

  

1 - www.chron.com/news/article/New-act-clears-up-estate-gift-tax-confusion-4301217.php [2/22/13]

2 - www.nolo.com/legal-encyclopedia/changes-gift-tax-laws-coming.html [1/13]

3 - www.forbes.com/sites/deborahljacobs/2013/01/02/after-the-fiscal-cliff-deal-estate-and-gift-tax-explained/ [1/11/13]

 

 

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. 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.



 

 

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How & When to Sign Up for Medicare

 

Breaking down the enrollment periods and eligibility.

 

June 2013
 

 

If you are not of Medicare age, we encourage you to pass this newsletter along to friends and family who are!
 

 

Medicare enrollment is automatic for some of us. If you are age 65 and eligible to receive Social Security benefits (or married to someone eligible to receive them), then you are also automatically eligible for Medicare Part A (free hospital insurance) and Medicare Part B (medical insurance for which you pay premiums), a.k.a. “original Medicare”.1
 

  

If this is the case, then you'll get a red-white-and-blue Medicare card in the mail 3 months before your 65th birthday.2
 

 

Others may need to sign up. You can apply to receive Medicare benefits even if you haven’t retired. If you’re coming up on 65 and you don’t yet receive Social Security benefits, SSDI or benefits from the Railroad Retirement Board, visit your local Social Security Administration office or dial (800) 772-1213 or go to www.ssa.gov to determine your eligibility.1,2

 

If you are eligible, you have the choice of accepting or rejecting Part B coverage. If you want Medicare Part A and Medicare Part B, then you should sign your Medicare card and keep it in your wallet. If you don’t want Part B, you put an "X" in the refusal box on the back of the Medicare card form, and send the form to the address shown right below where your signature goes. About four weeks later, you will get a new Medicare card indicating that you only have Part A coverage.3
 

  

When you are enrolled in Medicare Part A & Part B (sometimes called “original Medicare”), you can join a Medicare Advantage plan (Part C). Anyone enrolled in Part A, B or C becomes eligible for prescription drug coverage (Part D).1
 

 

If you are 65 or older and aren’t eligible for Medicare Part A, you can still sign up for Part B as long as you are a U.S. citizen or a legal resident of this country for five years or longer.1
 

 

If you choose not to enroll in Part B during your initial enrollment period, you have another annual chance to sign up for it during a “general enrollment period” from January 1 through March 31, with Part B coverage commencing July 1.1
 

 

If you already have medical insurance through a group health plan at your workplace or your spouse’s workplace, you can either enroll in Part B while you are still covered by that plan or enroll in Part B within eight months of leaving your job or losing your health coverage, whichever happens first.1
 

 

When can you add or drop forms of Medicare coverage? Medicare has enrollment periods that allow you to do this.
 

 

*The initial enrollment period is seven months long. It starts three months before the month in which you turn 65 and ends three months after that month. You can enroll in any type of Medicare coverage within this seven-month window – Part A, Part B, Part C (Medicare Advantage Plan), and Part D (prescription drug coverage). If you don’t sign up for Part D coverage during the initial enrollment period, you may have to pay a penalty to add it later.4
 

 

*Once enrolled in Medicare, you can only make changes in coverage during certain periods of time. For example, the annual enrollment period for Part D is October 15-December 7, with Part D coverage starting January 1. (You can also drop Part D coverage, leave one Part C plan for another, or switch from a Part C plan to original Medicare or vice versa in this period.)4
 

 

*There is also an annual open enrollment period from January 1-February 14. During this one, you can switch out of a Part C plan and go back to original Medicare with Part A & B coverage starting on the first day of the month following that switch. If you do this, you have until February 14 to also join a Part D plan if you want to add drug coverage to complement Parts A and B. Part D coverage kicks in at the start of the month after the Part D plan receives your enrollment form.4
 

 

Special situations. Individuals with end-stage kidney failure who need dialysis or a transplant may qualify for Medicare regardless of age. Upon diagnosis, they can contact the SSA. Medicare coverage usually takes effect three months after a patient begins dialysis. People with Lou Gehrig’s Disease (ALS) are automatically enrolled in Medicare as soon as they begin receiving SSDI payments. Americans who are under 65 and disabled also qualify for Medicare.2,3
 

 

Do you have questions about your eligibility, or that of your parents? Your first stop should be the Social Security Administration - (800) 772-1213 or www.socialsecurity.gov. You can also visit www.medicare.gov and www.cms.hhs.gov.   
 

 

Going through Medicare options and determining what is best for you can be overwhelming. You may have specific needs and questions based on your individual situation. We are happy to set up a phone call or meeting to discuss your Medicare options. Just call our office!
 

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

 http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 
 



Citations.

1 - www.socialsecurity.gov/pubs/10043.html#a0=2 [9/25/12]

2 - www.medicare.gov/sign-up-change-plans/get-parts-a-and-b/when-and-how-to-get-parts-a-and-b.html [2/27/13]

3 - www.slhn.org/Pay-Bills/FAQ/Medicare-FAQ.aspx#4 [2012]

4 - www.medicare.gov/Publications/Pubs/pdf/11219.pdf [10/12]

 

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. 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.
 

 

 

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Getting Things Done in Washington

 

 

May 22, 2013

 

 

If you're among those who believe that nothing can get done within the partisan bickering on Capitol Hill, you should know that both parties came together with remarkable speed recently to pass bipartisan legislation. There was virtually no bickering, posturing or visible hostility as a new modification of the STOCK Act (Stop Trading on Congressional Knowledge) sailed through both houses of Congress.

 

 

The original STOCK Act, which became law just a year ago, was designed to discourage top government officials and members of Congress from enriching themselves by buying and selling stocks based on non-public information that they--but not the rest of us--had access to. The law required that Congressional staffers and 28,000 employees of the executive branch of government disclose their portfolios and trades. These financial disclosures were to be posted in an online database open to the public, so researchers could look over the shoulders of our elected officials and their key staffers, and notice any suspicious trades that resulted in mysterious financial windfalls.

 

 

The new law eliminated the disclosure laws for Congressional staffers and government employees, leaving them in place only for members of Congress, Congressional candidates and the President and Vice President. Insider trading instantly became much easier in Washington--which appears to be about the only thing Congressional Democrats and Republicans can agree on these days.

 

 

Isn’t it amazing how Congress can pass bills so expeditiously when it suits their own needs!

 

 

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.


 

 

 



Source:

www.bobveres.com

http://finance.yahoo.com/news/insider-trading-nations-capital-just-123453723.html
 

 

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Phishing Scams Continue to Plague Consumers

 

May 17, 2013

Back in 2011, we sent out a newsletter about Phishing Scams (See original newsletter below). "Phishing" continues to be a serious problem and it is important for everyone to know what to look for.


 
 
Just last week, Ed Sr. received the following phishing email:

 

 

From: This email address is being protected from spambots. You need JavaScript enabled to view it. [ This email address is being protected from spambots. You need JavaScript enabled to view it. '; document.write(''); document.write(addy_text27576); document.write('<\/a>'); //-->\n This email address is being protected from spambots. You need JavaScript enabled to view it. ]
Sent:Thursday, May 09, 2013 4:58 PM
To:Ed Kohlhepp
Subject:irs.gov - Your 2013 Benefit.

 

http://www.irs.gov/static_assets/img/logo.png

We at the Internal Revenue Service would like to inform you that, you have qualified for 2013,
subsidy benefit.

Simply reply to this secure message with the following details below & you will be notified shortly.


Full Name:
Complete Address:
Telephone Number:

Social Security Number:
Date of Birth
(mmddyyyy):

ID Type:
Issuing State:
ID Number:

Bank Routing Number:
Deposit Account Number:


Please disregard this message if you have already mailed your response.
©2013 Internal Revenue Service | U.S. Department of the Treasury

 
 
Notice thedetails in this email in the efforts to make this look legitimate - the IRS logo, the sender's email address, not to mention the convenient timing of sending an email like this when people may be expecting to hear about tax refunds.

 
 
We have reported this email to the IRS. The IRS does not initiate contact with taxpayers by email to request personal or financial information.In addition, you should neverdisclose such information, as listed in the email above, to any source via standard email. 

 
 
Following are some additional sources and helpful articles to give you more information about phishing scams and identity theft and what you can do to protect yourself:
 
Remember, our office will never ask for such information via email. And if we need to send you any information or forms that do contain secure information such as a social security number, date of birth, or an account number, we will ONLYsend it via our secure, encrypted email service - SmarshEncrypt. If you are ever unsure - just call!

 
 
Enjoy the weekend and always be alert!


 
Sincerely,
All of us at Kohlhepp Investment Advisors, Ltd.



http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

_____________________________________________________________________________________________

April 5, 2011
 

 

New Email Breach Sends A Warning: Don’t Let Hackers Reel You In With Phishing Scams

 

Scammers gained access to millions of email addressesover the weekend by hacking into a Dallas company that manages email accounts for major banks and retailers including Chase, Citi and Best Buy.

 

That will make it easier for the crooks to fool people by sending them phony websites made to look like the real deal, since they know the recipients are actually customers of the company they simulate. Called “phishing,” this scam attempts to get you to log in to your online account, which of course provides your username and password to the scammers.

 

There is a simple way to avoid getting hooked by phishing scams – always visit company websites by opening them in your browser. Never go to a company website through a link in an email.

We have all developed bad habits based on the convenience of just clicking on a link, but in these dangerous times you should refrain from using links unless you specifically requested them, for instance by asking for your password information.


Please be sure to read this Yahoo Finance article for more information on this breach and for tips on how to protect yourself from possible phishing scams.


We hope all of you are enjoying the start of Spring! As always, call us with any questions.


Sincerely,
All of us at Kohlhepp Investment Advisors, Ltd.
 

 

 

Sources:

Advisor4Advisors, Brian Edelman, Financial Computer Services

Yahoo Finance

 

 

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Lower Deficits and Bad Data

 

 

 

May 10, 2013
 

 

America's budget deficit is ballooning out of control, right?

 

As it happens, while Congress and certain pundits scream that we need to cut government spending, analysts are discovering something surprising: the U.S. government budget deficit this year and next appears to be shrinking. The Wall Street firm Goldman Sachs has issued a report which lowered fiscal 2013's estimated red ink from $900 billion to $775 billion, or about 4.8% of total U.S. economic output.

 

 

How did this happen? Spending is down as a result of the sequestration ($85 billion this year) and prior spending cuts, plus tax revenues are up 12% over last year, the report tells us. It says that the deficit may come in even smaller than currently anticipated, due to the higher payroll taxes that are only now starting to be counted on the government's balance sheet. If the economy grows faster than expected, that, too, could bring in higher-than-anticipated revenues. Goldman now projects the budget deficit to fall to just 2.7% of economic output by the 2015 fiscal year, which many economists believe is a sustainable level.

 

 

Interestingly, some global economists are not happy about this optimistic budget news. Senior members of the International Monetary Fund are criticizing Washington policymakers for imposing too much budget austerity, too soon, arguing that it is preventing the unemployment rate from coming down more quickly.

 

 

Meanwhile, one of the most influential arguments for bringing the overall deficit down before it reaches 90% of American GDP has taken a serious hit to its credibility. In an astonishing development, three professors from the University of Massachusetts have looked over spreadsheet data behind a highly influential book published by professors Carmen Reinhart and Ken Rogoff, which purports to show that throughout history, nations have typically foundered when their debt level reached certain thresholds. The UMass professors found that in their calculations, Reinhart and Rogoff inadvertently omitted data for three countries: Australia (1946-1950), New Zealand (1946-1949) and Canada (1946-1950). An embarrassing coding error in the spreadsheet also excluded other data from five countries: Australia, Austria, Belgium, Canada and Denmark.

 

 

When the missing information was correctly included, it painted a very different picture of the dangers of high government debt levels. In the original report, whenever countries reached overall government levels of 90%, they experienced negative GDP growth--essentially, a recession--in aggregate over the countries studied. With the new data, countries crossing that threshold, in aggregate, actually experienced 2.2% positive growth levels.

 

 

This revisionist view is actually being confirmed in the real world. Japan has the highest debt-to-GDP ratio in the world, well beyond the supposed collapse threshold, and its interest rates have remained stubbornly low (as, to be fair, has its economic growth). Southern European countries that have embraced austerity--like Greece, Spain and Portugal--have endured multiple recessions, the opposite of what the original (flawed) Reinhart/Rogoff data suggested. The United States, which opted for a stimulus approach to the 2008 meltdown, is recovering faster than any developed country in the world.

 

 

Getting the economy healthy accomplishes two things: it lowers the budget deficits by bringing in more tax revenues, and it further lowers the debt-to-GDP ratio by expanding the GDP number in the equation. Nobody argues that America can keep piling up debt forever. But it seems clear, from the data on the ground and from the corrected data in the influential report, that the stimulus efforts after the Great Recession weren't quite the terrible decision that they are sometimes made out to be.

 

 

Sincerely,

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

 

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

 

 

 

 


Sources:

www.bobveres.com

http://economix.blogs.nytimes.com/2013/04/22/the-incredible-shrinking-budget-deficit/?partner=yahoofinance

http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_301-350/WP322.pdf

http://www.businessinsider.com/paul-krugman-is-right-2013-4

 

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It's What You Keep

 

May 7, 2013


With the recent market rally there has been a lot of talk about the sustainability of this run up. It is important to always take a step back and keep things in perspective. When building an investment strategy, by definition, you should consider protection first and promotion of growth second. As the risk appetite begins to increase keep the chart below in mind. During the last 33 years,the markets have sustained an intra-year drop on average of 14.7% - this correction can happen in positive years and negative years.The big picture needs to focus on keeping your strategy in check and avoiding speculation. At the end of the year, riding all the highs of the market will not mean as much if you give it all back. We know that a market correction is inevitable; we just don’t know if it is imminent!

 



If you have any questions or would like to discuss your portfolio, please contact us.

As always, thank you for allowing us to serve you!

 

Sincerely,

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

 

http://www.facebook.com/pages/Kohlhepp-Investment-Advisors/143204745739600
 

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.
Past performance is not a guarantee of future results.

 

Sources:
Mark E. Engberg, CFP® ,
JP Morgan Asset Management

 

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Kohlhepp Investment Advisors, Ltd.
3655 Route 202, Suite 100
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Phone: 215-340-5777
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Email: Info@KohlheppAdvisors.com

Securities offered through Cambridge Investment Research, Inc. a Registered Broker/Dealer, Member FINRA/SIPC. Investment Advisory Services offered through Kohlhepp Investment Advisors, Ltd., a Registered Investment Advisor. Kohlhepp Investment Advisors, Ltd. and Cambridge Investment Research Advisors, Inc. are not affiliated.

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