Catalysts on the Horizon

Jeffrey Kleintop, CFA
Chief Market Strategist
LPL Financial

Highlights

• We continue to believe a late-year rally for stocks will fulfill our long held outlook for modest single-digit gains on the year for the S&P 500.

• Unfortunately, all of the potential catalysts are a month or more away while the economic data continues to disappoint.

• In the meantime, we continue to find yieldproducing investments attractive, including High-Yield Bonds, which offer investors a return while waiting out the volatility in the stock market.

The stock market posted solid gains on Friday August 27, but still closed lower for the third week in a row. Economic data was generally disappointing, especially housing. This week brings the most important data of the month, including the Institute for Supply Management (ISM) gauge of conditions in the manufacturing sector and the employment report. Outside of consumer spending, the majority of these indicators are likely to show sequential declines.

We continue to believe a late-year rally for stocks will fulfill our long-held outlook for modest single-digit gains on the year for the S&P 500. However, over the next month or two, the risk that the soft spot lingers and pulls the market back to the lows of the year is significant. Seasonal factors also favor caution given the historically weak performance in September and October. Since 1950, the month of September has more often led to a decline than a gain in the S&P 500 index. However, November and December have provided some of the best returns of the year, on average. [Charts 1 and 2]

There are a number of potential catalysts for a fourth quarter rally:

• At the Federal Reserve (Fed) Meeting on September 21, the Fed may announce additional stimulus measures to stimulate growth. On Friday of last week, in his speech from the Fed’s Jackson Hole symposium, Fed chairman Ben Bernanke seemed to pave the way for another round of monetary stimulus. Although he noted that the Fed needs to see more evidence of a slowing economy or further disinflation to act. Friday’s profit warning from a large Technology company is potentially significant in tilting the Fed towards easing should it be followed by a number of other companies in the coming weeks. The unemployment rate ticking up in the August employment report due to be released this Friday would move the Fed in the direction of more stimulus, as well. It may be unlikely the Fed will move as soon as a few weeks from now, there will be plenty of data released before the September 21 FOMC meeting that could show further softening of the economy, raising investor expectations for Fed action.

• Positive pre-election policy discussions in Washington as incumbents seek to alter the tide of the popular vote — often termed an “October surprise”. In the weeks ahead of the November 2 midterm elections, incumbents in Washington may take positive stances on issues that are market friendly. Incumbents are in trouble according to state and regional polling data. In seeking to turn the tide of voter sentiment they may talk about tax cuts or other issues favorable to stock market investors.

• Post-election clarity in Washington may begin to emerge. The balance of power is likely to shift between political parties following the elections. This may lead to more of a political balance in Washington and slow the pace of legislative change resulting in the “gridlock” the market has historically favored.

• Following the election, the potential for tax cut extensions may become more visible. Based on comments in recent weeks, the party consensus among congressional Democrats on taxes seems to be eroding with some members increasingly in favor of extending the Bush tax cuts. After the election, it is possible PAYGO rules that require budget offsets to any tax cuts are waived allowing the extension of many, if not all, of the Bush tax cuts into 2011.
• The fourth quarter of mid-term election years is almost always favorable for stocks. The market’s reaction to mid-term elections, as uncertainty fades, has almost always been positive, with fourth quarter gains averaging 8% in mid-term election years. So far, the stock market performance in 2010 has tracked the typical pattern for U.S. stocks in mid-term election years, albeit with a bit more than the usual volatility.

• If history is any guide, the disappointingly soft economic data over the past few months may soon begin to firm. Looking back over the past 60 years, about one year after the start of every recovery a soft spot emerges. Some closely watched indicators of growth are likely to be near the bottom of their typical soft spot-driven decline and poised for a rebound. As the data begins to firm later this year, the typical pattern of recovery may continue to unfold as it did in the post-recession recovery years of 2003 and 2004 when a late year rally in 2004 resulted in gains for the year. [Chart 3]

Unfortunately, all of these potential catalysts are a month or more away while the economic data continues to disappoint.

The volatility that has defined this year is likely to continue with ongoing losses to be recouped by a late-year rally. In the meantime, we continue to find yield-producing investments attractive, including High-Yield Bonds, which offer investors a return while waiting out the volatility in the stock market.

 To download the complete article click below

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The ISM index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

High-Yield/Junk Bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise, are subject to availability, and change in price.

It Has Been a Long, Cold Summer

John Canally, CFA
Economist
LPL Financial

Highlights

• A busy week for data capped off by the August employment report.

• While temperatures have been well above normal this summer, the economic data has been downright chilly, raising the odds of more policy action from the Federal Reserve later this year.

The week before the Labor Day holiday is traditionally a slow week for financial markets, which is not likely to be the case this week, as there are plenty of key reports on the economy for July and August to keep market participants’ minds off their vacations. Markets are still buzzing about what Fed Chairman Ben Bernanke did or did not say at a speech in Wyoming on Friday, August 27, and while Bernanke is in vacation mode this week, several of his colleagues on the Federal Open Market Committee (FOMC), the Fed’s monetary policymaking arm, are on the docket. Data on both the manufacturing and service sectors in August are due out in China, as policymakers in Beijing debate whether the Chinese economy needs another dose of stimulus. In Europe this week, the economic data calendar remains busy, as market participants try to gauge whether or not the recent series of better-than-expected economic data was a head fake prior to the onset of the fiscal tightening that is just now taking place. [Chart 1]

In the United States, the week kicks off with data on spending and incomes in July, and by mid-week, the market will be focusing on the Institute of Supply Management’s (ISM) manufacturing index for August. The economic reports over the final two days of the week are dominated by the labor market, with the August employment report due out on Friday, September 3. Because temporary workers hired to conduct the 2010 Census are still being laid off as the Census-taking process winds down, the market will again be focused on employment in the private sector, where more than 600,000 jobs have been created since the start of the year. The economist consensus expectation is that the private sector added about 50,000 jobs in August, a slightly slower pace of job growth than the 71,000 jobs added in July. As of Monday, August 30, the highest economist estimate for job creation in August is 120,000. The lowest estimate is -17,000. A change in private sector payrolls in August within that range is not likely to move markets. The unemployment rate is expected to tick up to 9.6% in August from 9.5% in July.

Is Another Round of Quantitative Easing in the Cards?

The economic data released last week was once again on the wrong side of consensus, and continued to show that the recovery in the U.S. economy that began in mid-2009 had slowed noticeably by mid-2010. For most of the late spring and summer of 2010, a significant portion of the U.S. economic data released last week (August 23-27) fell short of expectations, and represented a downshift in activity from the prior month. As we detailed in the Weekly Economic Commentary of August 16, our view remains that economic growth in the second half of 2010 will be slower than growth in the first half.

While the odds of a double-dip recession have risen (to around 20% in our view), the main preconditions for a double dip are not in place now.

In a much-anticipated speech last week at the Fed’s annual summer symposium in Jackson Hole, Wyoming, Fed Chairman Bernanke agreed with our assessment of the economic outlook: no double dip. However, the Fed remains far more optimistic about the economy in 2011 than most private forecasters, ourselves included. The Fed’s forecast of 3.5% to 4.2% for Gross Domestic Product (GDP) in 2011 is well above the 2.8% consensus of private sector economic forecasters. In his Jackson Hole speech, Bernanke stated that the preconditions for a pickup in growth in 2011 “appear to be in place”, citing a variety of factors that we note often in this and other publications, including:

• Monetary policy remains very accommodative.
• Financial conditions have become more supportive of growth.
• Banks are improving their balance sheets and appear more willing to lend.
• Consumers are reducing their debt and building savings, returning household wealth-to-income ratios near to longer-term historical norms.
• Stronger household finances, rising incomes, and some easing of credit conditions will provide the basis for more-rapid growth in household spending next year.
• Business investing in equipment and software should continue to grow at a healthy pace in the coming year, driven by rising demand for products and services, the continuing need to replace or update existing equipment, strong corporate balance sheets, and the low cost of financing, at least for those firms with access to public capital markets.
• On the fiscal front, state and local governments continue to be under pressure; but with tax receipts showing signs of recovery, their spending should decline less rapidly than it has in the past few years.
• Federal fiscal stimulus seems set to continue to fade but likely not so quickly as to derail growth in coming quarters.

However, Bernanke also hinted that if the economic outlook were to “deteriorate further” (i.e. the daily, weekly, and monthly drumbeat of economic data continues to come in on the weak side of expectations), the Fed stands ready to embark on another round of stimulus, which could includes:

• Additional Quantitative Easing (QE): large scale purchases by the Fed of agency debt, agency Mortgage-Backed Securities (MBS), and longerterm Treasury securities
• Modifying communication to suggest “extended period” means the Fed is on hold for an even longer period of time than currently believed
• Reducing the interest rate paid on excess reserves held by banks at the Federal Reserve.

Of the three, Bernanke’s speech suggested that the Fed would prefer to use QE to stimulate the economy. The Fed’s first foray into quantitative easing began in March 2009, and saw the Fed purchase $1.25 trillion of MBS, $175 billion of agency debt and $300 billion in Treasuries by the end of March 2010. The result was lower borrowing costs for businesses, and importantly, homeowners and households looking to repair their balance sheets.

Market participants are likely to have several questions about the next round of QE, including:

• When will it occur?
• How much additional agency, MBS, and Treasury debt will the Fed buy?
• Will it be effective in keeping the economy out of a double-dip recession?

As to when QE might commence, the next FOMC meeting is September 21, and the market will focus on that date in the near term. In our view, there is probably not enough data on the economy due out between now and then to force the Fed’s hand. November 3, the day after the 2010-midterm elections, is the next FOMC meeting, and by then the Fed will have digested two more jobs reports, two more months of retail sales and inflation data, and perhaps another Senior Loan Officers survey.

As to the size of the action, the market seems to be focused on the $1 trillion mark, smaller than the first round of QE, but enough to be felt in the targeted markets and in the economy.

The real debate among market participants will be around the effectiveness of any additional QE. Some will argue that the Fed is merely “pushing on a string”, by pushing rates on mortgages and bank loans even lower, because the issue is not the cost of the financing for businesses and households, it is the availability of financing. Our view is that credit is becoming more readily available in the system, and that lower rates will help eligible businesses to continue to lower their borrowing costs, and that lower consumer financing rates will further hasten the repair of consumer balance sheets, which has progressed nicely over the past 18 months, but may have another 12 to 18 months to go.

To download the full article click below

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Investing in international and emerging markets may entail additional risks such as currency fluctuation and political instability. Investing in small-cap stocks includes specific risks such as greater volatility and potentially less liquidity.

Stock investing involves risk including loss of principal Past performance is not a guarantee of future results.

The ISM index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.

Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of a fund shares is not guaranteed and will fluctuate.

Mortgage Backed Securities are subject to credit, default risk, prepayment risk that acts much like call risk when you get your principal back sooner than the stated maturity, extension risk, the opposite of prepayment risk, and interest rate risk.

Bank Loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.

Economic Soft Spot May Soon Firm Up

Jeffrey Kleintop, CFA
Chief Market Strategist
LPL Financial

Highlights

• If history is any guide, the disappointingly soft economic data over the past few months may soon begin to firm.

• Looking back over the past 60 years, about one year after the start of every recovery a soft spot emerges.

• Some closely watched indicators of growth are likely to be near the bottom of their typical soft spot-driven decline and poised for a rebound.

• As the data begins to firm in the coming months, the stock market may mount a fourth quarter rally achieving the modest single-digit returns we have forecast for 2010.

If history is any guide, the disappointingly soft economic data over the past few months may soon begin to firm.

Looking back over the past 60 years, about one year after the start of every recovery a soft spot emerges. These soft spots were not signs that the recovery was going to fail. In fact, in every case the recovery was successful and a multi-year period of economic growth followed. Some of the most current indicators of economic activity include the Institute for Supply Management Purchasing Managers Index (ISM), initial claims for unemployment benefits, consumer confidence, and the stock market. Around the time of these prior soft spots:

• The ISM consistently fell back to about the break-even level of 50. In August, the ISM was reported at 55.5, on its way down from the recent peak of 60.4. This index remains above 50 and is unlikely to have completed the full decline associated with the soft spot.
• The weekly number of first-time filings for unemployment benefits rose by 49,000. As of last week, jobless claims are up 73,000 from the low earlier this year, exceeding the typical rise by a potentially worrisome margin. However, on July 22 President Obama signed into law a measure restoring unemployment benefits to 2.5 million people. Since the passage of the law in mid-July initial claims for unemployment benefits have been on the rise. The extension of benefits at the end of July may be prompting Americans, whose assistance ran out, to file new claims causing the number of initial claims to rise rather than being driven by a new rising trend in layoffs. Supporting this notion is the fact that planned job cuts at U.S. corporations tracked by Challenger, Gray & Christmas Inc. have been falling.
• Consumer confidence declined by 13 points. The Conference Board reported that in July consumer confidence had declined 12.3 points from the recent high in May. The shaken confidence of consumers may begin to stabilize now that the typical soft spot decline has taken place. Daily and weekly measures of consumer confidence are showing an improving trend in August.
• The S&P 500 fell about 7% below its 200-day moving average. As of July 2, the S&P 500 had fallen 7.7% below the 200-day moving average. This is in line with the typical soft spot decline and suggests stocks may have already experienced the low point for the year. As of Friday, the index had recovered to 4% below the 200-day moving average.

The economic soft spot is likely to continue to unfold over the remainder of the quarter; however, some closely watched indicators of growth are likely to be near the bottom of their typical soft spot-driven decline and poised for a rebound. Notably, the weakness in the stock market, the labor market, and consumer confidence may have bottomed suggesting fears of a doubledip recession are overblown catching pessimistic investors by surprise.

Supporting our outlook is the LPL Financial Current Conditions Index (CCI), a weekly measure of the conditions that we believe are most relevant to growth in the markets and economy. Although the CCI shows us that growth momentum has stalled over the past three months, the vast majority of the ten CCI components point to an environment of growth.

As the data begins to firm, the stock market may mount a fourth quarter rally achieving the modest single-digit returns we have forecasted for 2010.

Click Below to download a pdf of the article

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The ISM index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Challenger, Gray & Christmas is the oldest executive outplacement firm in the United States. The firm conducts regular surveys and issues reports on the state of the economy, employment, job seeking, layoffs, and executive compensation.

For more information on the Current Conditions Index (CCI) Components, please see the weekly publication published each Wednesday.

Contact: Helena Ruffin
                  310-399-1200
                  helena@rosegreene.com

Rose Greene, CFP© ATTENDS LPL FINANCIAL 2010 NATIONAL CONFERENCE, A LEADING FINANCIAL SERVICES EVENT FOCUSED ON INCREASING VALUE TO INVESTORS

Santa Monica, CA – August 17, 2010—Rose Greene of Rose Greene Financial Services in Santa Monica recently attended focus10, a leading financial services industry conference hosted by LPL Financial, an independent broker-dealer.  Rose Greene Financial Services is associated with LPL Financial.

Held in Boston from July 28 to July 31, 2010, focus10 was one of the industry’s largest gatherings of independent financial advisors, and remains the industry’s premier sales and education event. Approximately 4,500 attendees from around the country assembled for the opportunity to learn new strategies and skills, expand knowledge in numerous product areas and network with peers and industry experts. They also heard from influential speakers who addressed current events and financial industry trends. The speakers included Bill Clinton, 42nd President of the United States; Jack Welch, former chairman and CEO of General Electric; and Benjamin Zander, conductor of the Boston Philharmonic.

Additionally, through the hundreds of business sessions, technology training sessions and continuing education classes at this event, LPL Financial advisors gained valuable knowledge to help them continually improve the service they offer to clients and operate their independent practices more efficiently.

Bill Dwyer, president of National Sales and Marketing for LPL Financial, said, “The theme of our focus10 event, A Focus on the American Dream, clearly resonated with the current mood of Main Street U.S. investors.  Supporting our independent advisors as they help their clients achieve the American Dream on their terms remains our overarching mission at LPL Financial.”

About  Rose Greene Financial Services
Rose Greene Financial Services, founded in 1986,  is an independent and unique, entrepreneurial financial advisory practice. As an independent representative of LPL Financial, Rose Greene Financial Services provides unbiased investment advice and services including wealth management; retirement planning; college planning; life, health and long-term care insurance services; Medicare planning; estate planning and charitable giving. Her client base is highly diverse with a concentration in the baby boomer market, gay and lesbian community and entertainment industry. With more than 27 years in the industry, Rose Greene Financial Services has extensive experience serving clients through difficult market environments including the past six bear markets, as well as experience in helping near-term and current retirees plan for retirement income distributions. Her investment philosophy is rooted as much in strategies for managing downside risk as it is in building upside growth potential. Rose Greene Financial Services is located in the Santa Monica area of Los Angeles. For more information, visit www.rosegreene.com.

About LPL Financial
LPL Financial is an independent broker-dealer with over 2,500 employees and offices in Boston, Charlotte, and San Diego.  LPL Financial and its affiliates offer proprietary technology, comprehensive clearing and compliance services, practice management programs and training, and independent research to over 12,000 independent financial advisors and financial advisors at financial institutions.  Additionally, the company supports over 4,000 financial advisors who are affiliated and licensed with insurance companies with customized clearing, advisory platforms and technology solutions.  For more information, please visit www.lpl.com.

Securities and financial planning offered through LPL Financial, member FINRA/SIPC.

Missed Opportunity

Jeffrey Kleintop, CFA
Chief Market Strategist
LPL Financial

Highlights

• In the first quarter, the markets were focused on a slowdown in China, in the second quarter the concern moved to a slowdown in Europe, and in the third quarter the growth scare has shifted to the United States. In each of the prior quarters, markets made their low at the midpoint of the quarter as a policy announcement turned the tide on investor sentiment.

• It appears that the Fed missed the opportunity to turn sentiment around with their mid-quarter policy announcement last week. Without a potent policy driver, the fear surrounding the U.S. outlook may not dissipate as quickly this quarter as it did during the first two quarters of the year and linger into the fourth quarter.

• The mid-quarter policy driver during the fourth quarter may be the mid-term elections held in November. This event may be potent enough to turn sentiment around and produce gains for the year in line with our forecast for modest single-digit gains.

This year has been defined by three growth scares. In the first quarter, the markets were focused on a slowdown in China, in the second quarter the concern moved to a slowdown in Europe, and in the third quarter the growth scare has shifted to the United States. In each of the prior quarters, the concern peaked at the midpoint of the quarter:

• During the first quarter, the Chinese stock market, measured by the Hang Seng Index, bottomed around the middle of the quarter on February 8.
• During the second quarter, the European stock market, measured by the S&P 350 Europe Index, bottomed around the middle of the quarter on May 25.

We have reached the midpoint of the third quarter and so it may come as no surprise that there is a lot of pessimism about the U.S. economic outlook. Although, the U.S. stock market, measured by the S&P 500, remains up about 6% from the third quarter low on July 2, the S&P 500 fell by a sharp 4% since Monday (August 9) of last week.

In each of the prior quarters, the midpoint of the quarter coincided with a policy announcement that turned the tide on investor sentiment:

• In the first quarter, the change in sentiment was driven by the monthly economic reports in China released on February 9 and 10 that reflected solid growth and were not accompanied by any new policy announcements intended to slow the economy. In prior months, the midmonth data releases had coincided with announcements of policy changes intended to slow growth in the Chinese economy.
• In the second quarter, the change in sentiment was driven by the passage of the trillion dollar European rescue package. The debt problems were addressed by this program that ensured adequate capital to meet the financing needs over the next few years for Europe’s most troubled economies.

It appears unlikely that the mid-quarter policy driver for the third quarter was the Fed’s announcement last week that they will reinvest proceeds from interest and principal from maturing mortgage-backed bonds into the bond market. While this news initially led to a stock market rally after it was announced at 2:15 pm on Tuesday and stocks returned to, the three-month high in the S&P 500 set the day before, the stock market later decided this action was not what it had hoped for and opened down sharply the following morning. We noted in last week’s commentary, entitled Uncertain Fed Means Certain Outcome, that the Fed typically provides added economic stimulus at this point in the economic cycle. The disappointment in the lackof a more substantial action from the Fed was obvious and both stocks and bond yields dropped. It appears that the Fed missed the opportunity to turn sentiment around in a way similar to the policy-driven shifts in the first and second quarters.

Without a potent policy driver, the current growth scare may not dissipate this quarter as it did during the first two quarters of the year. Much of the economic data of late has come in worse than the consensus economist expectations and worse than the prior month. Our view remains that economic growth will decelerate but remain positive, in the second half of 2010. This is likely to keep the stock market volatile and range-bound during the remainder of the third quarter.

The fourth quarter may hold the key to the year for stock market performance. The restoration of a balance between the parties in Washington may be welcomed by markets. The market’s reaction to midterm elections has nearly always been positive, even when the balance of power has shifted in one or both houses of Congress — as we expect this year with the Republicans having a good chance of taking the House on November 2. The average gain for the S&P 500 in the fourth quarter of a mid-term election year is a solid 8% (see the Weekly Market Commentary from August 2 entitled “Mid-Term Market Moves” for more information). This mid-quarter policy driver may be potent enough to turn sentiment around and produce gains for the year in line with our forecast for modest single-digit gains.

To download this commentary click below

IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The S&P Europe 350 Index is a stock index of European stocks. It is a part of the S&P Global 1200. The intent of the index is to track at least 70% of European equity market capitalization. The constituent shares are selected for relevance to the broad market, including industry sector balance, longevity (to minimize index turnover) and liquidity of the shares.

The Hang Seng Index is a market capitalization index of the top 33 companies listed on the Hong Kong stock exchange, administered by the Hang Seng Bank.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Uncertain Fed Means Certain Outcome

Jeffrey Kleintop, CFA
Chief Market Strategist
LPL Financial

Highlights

• In his recent testimony to Congress, Federal Reserve Chairman Ben Bernanke used the phrase “unusually uncertain” to describe the U.S. economic outlook. However, based on the Fed’s own words, this current level of uncertainty is actually common at this stage of the economic cycle.

• The response by the Fed to uncertainty over the economic environment has been anything but uncertain. They always provide the economy with one last booster shot of stimulus.

• We believe the Fed will remain on hold this week, but could undertake additional stimulus if the uncertainty lingers later this year.

In his recent testimony to Congress, Federal Reserve Chairman Ben Bernanke used the phrase “unusually uncertain” to describe the U.S. economic outlook. The word uncertain was used five times in the statement released at the conclusion of the June 23 meeting, and was used 16 times in the minutes released on July 28. We may see more of the word “uncertain” this week, as the Fed releases the statement from its August 10 meeting at 2:15pm that day.

The economy again began to grow last summer, putting the current bout of early cycle uncertainty at about four quarters since the end of the recession. In contrast to Chairman Bernanke’s remark, the current uncertainty is not all that unusual at this early stage of an economic cycle. In fact, based on the Fed’s own words, the current level of uncertainty is actually common at this stage of the economic cycle.

• In March 2003, about five quarters after the 2001 recession had ended, the Fed’s Beige Book used the word “uncertain” 30 times to describe the economic environment, almost twice as often as the July 2010 Beige Book. Also, the minutes of the March 2003 Fed meeting used the word “uncertain” 16 times, three times as often as the five times it was used in the June 2010 meeting minutes.
• In October 1992, about six quarters after the end of the 1991 recession, the word “uncertain” appeared 23 times in the transcript of the October 1992 Fed meeting.

The response by the Fed to uncertainty over the economic environment has been anything but uncertain. They have always provided the economy with one last booster shot of stimulus. During the past four decades, the Fed has cut rates one last time well after the recession had ended when a soft spot emerged. For example, related to the above examples of Fed uncertainty, the Fed cut the Federal Funds target rate in June 2003 and in September 1992.

With the Federal Funds target rate effectively at zero the typical rate cut is not an option this time, so what will the Fed’s uncertainty lead it to do?

• First, the Fed will likely signal its sensitivity to heightened risk by updating the message from the June meeting that it “will employ its policy tools as necessary” to reflect the latest language from the recent semiannual testimony that it “is prepared to take further actions as needed.” This will send the signal that the Fed has a greater bias toward easing monetary policy. This signal alone may have some of the effects desired by the Fed on the markets.
• Second, in lieu of the Fed cutting rates, they may reinvest interest and principal payments on the Fed’s holdings of Mortgage-Backed Securities back into the market with the intention of adding money to the system and keeping rates low. However, we believe the Fed is not likely to take this step without a downgrade to its recently stated growth outlook for above-average Gross Domestic Product (GDP) growth in 2011 and a 1% decline in the unemployment rate over the next year. The Fed has the ability to wait on any additional stimulus given the improvement in market conditions, from the stock market to the TED spread, since the last Fed meeting in June. If the uncertainty lingers, and the Fed further downgrades their outlook, the Fed could pursue the path of further easing consistent with prior early cycle periods of uncertainty.

Uncertainty is to be expected given the challenges facing an economy in the early stages of growth following an unprecedented upheaval. The sentiment of unusual uncertainty is expressed in this excerpt from the pages of TIME magazine:

“If America’s economic landscape seems suddenly alien and hostile to many citizens, there is good reason: they have never seen anything like it. Nothing in memory has prepared consumers for such turbulent, epochal change, the sort of upheaval that happens once in 50 years. “

“The outward sign of the change is an economy that stubbornly refuses to recover. In a normal rebound, Americans would be witnessing a flurry of hiring, new investment and lending, and buoyant growth. But the U.S. economy remains almost comatose a full year and a half after the recession officially ended. Unemployment is still high; real wages are declining.”

“The current slump already ranks as the longest period of sustained weakness since the Great Depression. That was the last time the economy staggered under as many “structural” burdens, as opposed to the familiar “cyclical” problems that create temporary recessions once or twice a decade. The structural faults represent once-in-alifetime dislocations that will take years to work out. Among them: the job drought, the debt hangover, the defense-industry contraction, the savings and loan collapse, the real estate depression, the health-care cost explosion and the runaway federal deficit.”

The same article quoted an economist as saying, “this is a sick economy that won’t respond to traditional remedies. There’s going to be a lot of trauma before it’s over.” But it was over. This excerpt is from September 28, 1992.

The recession ended in 1991 and real GDP was an above average +3.4% in 1992 (about the same pace of growth the economy has averaged this year). Yet, in September 1992, TIME described the economy as “comatose”. When the article was published, the economy had already been growing for six quarters. Hiring had weakened to averaging only +77,000 jobs per month in the four months leading up to this article, but in the following four months it averaged +210,000. In addition, while the structural problems apparent then seemed unsolvable for years to come, real GDP was +2.9% the following year.

It is not easy to assess the health of the economy as we are living through it. The amount of current press coverage devoted to fretting over a double-dip recession will be expanded by last Friday’s lackluster private payroll growth report of +71,000 for last month. We continue to believe the data supports a typical economic soft spot (much like the one in 1992) that always comes about one year after a recovery begins and not the double-dip that has been largely priced into the stock market.

In 1992, the uncertainty expressed in the sentiment from the Fed and in the media at the end of the third quarter set the stock market up for a solid fourth quarter rally after a relatively flat year for stocks in the first three quarters. The stock market in 1992 ended with a modest single-digit total return (including dividends) of 7.6%, very similar to our outlook for a modest single-digit gain this year.

To download this commentary click below

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Investing in international and emerging markets may entail additional risks such as currency fluctuation and political instability.

Stock investing involves risk including loss of principal. Past performance is not a guarantee of future results.

The TED Spread measures the difference between 3-month LIBOR rate and the yield on 3-month Treasury bills. This is an effective measure of the liquidity available to banks. With bank capital adequacy near the center of the current crisis this is an important gauge of the stress in the banking system. A rise in the TED Spread acts as a negative on the CCI.

Mortgage Backed Securities are subject to credit, default risk, prepayment risk that acts much like call risk when you get your principal back sooner than the stated maturity, extension risk, the opposite of prepayment risk, and interest rate risk.

Jeffrey Kleintop, CFA
Chief Market Strategist
LPL Financial

Highlights

• A catalyst for a late year rally could be the upcoming mid-term elections.

• The market’s reaction to mid-term elections has almost always been positive, with fourth quarter gains averaging 8% in mid-term election years.

• So far, the stock market performance in 2010 has tracked the typical pattern for U.S. stocks in midterm election years, albeit with a bit more than the usual volatility.

We continue to adhere to our long-held forecast for modest single-digit gains for the stock market in 2010, despite the lack of any year-to-date gain. As the August recess for Congress gets underway this week, the campaigning for mid-term elections heats up. A catalyst for a late year rally could be the upcoming mid-term elections. The elections may mark a shift away from the uncertainty surrounding the potential for sweeping legislative changes. In addition, as we noted last week, given the shifting sentiment on taxes the elections may be followed by Congress enacting fewer tax hikes for 2011 than are currently expected by market participants.

Click below to download the full article.

Planning for retirement is a lifelong process defined by distinct phases: the Accumulation Phase, represented by your working years; and the Distribution Phase, which you enter when you retire or begin tapping into your retirement savings. By implementing some basic planning steps during each of these phases, you can achieve your financial goals for retirement without undue stress. Following are some simple guidelines for your consideration.

The Accumulation Phase
During your working years, it is important to “set the stage” for a financially secure retirement by determining your retirement income needs. This task involves identifying your potential retirement expenses, as well as estimating the amount you might receive from each potential source of retirement income – e.g., Social Security, pensions, personal investments and employment earnings.

Doing this calculation will give you an idea of how much you may need to accumulate to finance a comfortable retirement. Don’t be surprised if the numbers add up to be a large sum – after all, this money may need to support you for 20 or 30 years. Fortunately, there are ways to leverage your dollars.

Starting to save early and contributing as much as possible to employer-sponsored retirement plans and IRAs may help you to potentially accumulate more money. Why? Because investing in these tax-advantaged accounts means your money will work harder for you. The longer the money sits untouched, the more it can potentially compound.

Another important step to take during the accumulation phase is to craft an appropriate asset allocation. The term asset allocation refers to the way you divide your investment nest egg among stocks, bonds and cash. The combination of assets you choose should reflect your financial goals, tolerance for investment risk and time horizon. Be aware that your asset allocation will need to be adjusted periodically in response to major market moves or life changes.

The Distribution Phase
Once you are nearing retirement, it will also be necessary to craft a solid strategy for the distribution of your assets. For example, did you know that one of the greatest risks retirees face is the possibility of outliving their money? That is why it is essential to determine an appropriate annual withdrawal rate. This amount will be based on your overall assets, the estimated length of your retirement, an assumed annual rate of inflation and how much your investments might earn each year.

Another consideration: After age 70½, you will have to begin making an annual withdrawal from some tax-deferred retirement accounts, including traditional IRAs.1 This is known as a required minimum distribution, or RMD. Preparing for this phase ahead of time may help reduce your tax burden, especially if your annual RMD may push you into a higher tax bracket.

Likewise, this is the time to make sure your final wishes are accurately documented and estate strategies are well underway to minimize the tax burden of your heirs.

Your Planning Checklist
Following is a list that can help you along the way. Find the category that best describes you. After answering the questions, bring the list to your financial advisor who can help make sure your retirement plan is on target.

Saving for Retirement

• Have you performed a comprehensive retirement needs calculation?
• Are you contributing enough to potentially reach your financial goal within your desired time frame by maximizing contributions to tax-advantaged retirement accounts, such as your employer-sponsored retirement plan and an IRA?
• Is your asset allocation aligned with your retirement goal, risk tolerance and time horizon?
•  Have you determined if you might benefit from contributing to a traditional IRA or a Roth IRA?₂
• Do you review your retirement portfolio each year and rebalance your asset allocation if necessary?

Nearing Retirement

• Do you know the payout options available to you (e.g., annuity or lump sum) with your employer-sponsored retirement account, and have you reviewed the pros and cons of each option?
• Have you considered your health insurance options, (i.e., Medicare and various Medigap supplemental plans or employer-sponsored health insurance), out-of-pocket medical expenses and other related health care costs?
• Have you contacted Social Security to make sure your benefit statement and  relevant personal information are accurate?
• Should you purchase long-term care insurance? If so, have you investigated which benefits are desirable?
• Is your asset allocation properly adjusted to reflect your need to begin drawing income from your portfolio soon?
• Have you determined an appropriate withdrawal rate for your assets to help ensure that your retirement money might last 20, 30 or more years?
• Have you figured the amount of your annual required minimum distribution (RMD) and developed a strategy to reduce your tax burden once you’re required to begin taking RMDs?
• Have you appointed a health care proxy and durable power of attorney to take charge of your health and financial affairs if you are unable to do so?
• Have you reviewed all your financial and legal documents to make sure beneficiaries are up-to-date?
• Are you making effective use of estate planning tools (such as trusts or a gifting strategy) that could reduce your taxable estate and pass along more assets to your heirs while also benefiting you now?

To download a pdf of this article click HERE

1Withdrawals will be subject to taxation upon withdrawal at then-current rates. In addition, early withdrawals before age 59½ may be subject to a penalty tax.

2Restrictions, penalties and taxes may apply. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted.

This article was prepared by Standard & Poor’s Financial Communications and is not intended to provide specific investment advice or recommendations for any individual. Consult your financial advisor or me if you have any questions.

LPL Financial receives high scores for investment performance and collaborative advisor relationship

LPL Financial ranks third in overall satisfaction nationally in the J.D. Power and Associates 2010 Full Service Investor Satisfaction Study.^SM  This is the third consecutive year that LPL Financial is among the top five investment firms nationwide in customer satisfaction. The study measures overall investor satisfaction with full service brokerage firms based on seven factors that influence the customer experience: Investment Advisor; Investment Performance; Account Information; Account Offerings; Commissions and Fees; Website; and Problem Resolution.

With an overall score of 791 on a 1,000-point scale, LPL Financial scores 22 points above the industry average. LPL Financial receives high scores in the two factors that have the highest impact on the overall customer satisfaction experience. In the Investment Performance factor, LPL Financial leads the industry with a score of 742 (39 points above the industry average) and ties for second in the Investment Advisor factor with a score of 875 (36 points above the industry average). While the market has experienced performance improvements in 2010, LPL Financial is the only firm in the study with an improved Investment Performance ranking in each of the past 3 years. LPL Financial customers say their portfolio performance is due to their investment advisor (69%), more so than to their own investment decisions or market fluctuations (10% and 21%, respectively).

“With an overall score of 791 on a 1,000-point scale, LPL Financial scores 22 points above the industry average.”

Since 2008, customers in the investment services industry have placed increasing importance on their investment advisor and less importance on the performance of their portfolio. According to customers, LPL Financial advisors develop strong relationships with them, and these customers are more likely to recommend their LPL Financial advisor than are customers of other investment firms included in the study. Customers say that LPL Financial has knowledgeable advisors who also inform them of up-to-date market trends and developments.

“Customers say that LPL Financial has knowledgeable advisors who also inform them of up-to-date market trends and developments.”

 At an industry level, customers who engage in a collaborative relationship with their advisor are far more satisfied with their investment firm, compared to those customers with a more “hands-on ” relationship. LPL Financial advisors demonstrate this particularly well, as nearly 3 in 4 customers say they have a collaborative relationship with their investment advisor.  This is due, in part, to LPL Financial advisors being among the most likely in the industry to discuss and incorporate customer risk tolerance and portfolio asset allocation and investment needs.LPL Financial customers are also more committed to their firm, compared to the industry average (43% highly committed), which is driven in part by an improvement in customers’ perceptions of the firm’s reputation. The relationships cultivated from the [LPL Financial] network of advisors results in the highest percentage of investors who say the advisor is actingin the investor’s best interests (97%).

Create a pool of healthcare dollars that will grow in any market.
Provided by Los Angeles Financial Planner, Rose Greene, CFP®

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. The 2010 report found that

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 it pays 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

Choosing a DBA. That 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. Some 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.

The Medicare misconception. Too many people think Medicare will pick up the cost of long term care. Medicare is not long term care insurance. 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.₂

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.

Why not look into this? You may have heard that LTC insurance is expensive compared with some other forms of policies. But the annual premiums (about as much as you’d spend on a used car from the late 1990s) are nothing compared to real-world LTC costs.4 Ask your insurance advisor or financial advisor 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.

If you would like a complimentary quote, please call our Director of Insurance, Helena Ruffin, who would be delighted to help you develop a plan for your long-term care insurance needs.

Rose Greene is a Representative with Rose Greene Financial and may be reached at www.rosegreene.com, 310-399-1200 or rose@rosegreene.com.

Citations.
1 genworth.com/content/etc/medialib/genworth_v2/pdf/ltc_cost_of_care.Par.85518.File.dat/Executive%20Summary_gnw.pdf  [4/10]
2 – aarp.org/families/caregiving/caring_help/what_does_long_term_care_cost.html [11/11/08]
3 – pbs.org/nbr/site/features/special/article/long-term-care-insurance_SP/ [11/11/08]
4 – longtermcare.gov/LTC/Main_Site/Paying_LTC/Private_Programs/LTC_Insurance/index.aspx [6/25/09]