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.

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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.

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.

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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.

Weekly Market Commentary, May 24, 2010
Jeffrey Kleintop, CFA
Chief Market Strategist
LPL Financial

Highlights

• We believe this pullback is merely part of the higher volatility in the markets we have been expecting this year to accompany the transition from recovery to sustainable growth.
• We offer ten reasons why we expect the markets to rebound during the second quarter.
• We still believe that while the next week or two could be up or down a little, four or six weeks from now stocks will be up and headed back near the highs of April.

Our outlook for 2010 remains for modest gains in the stock and bond markets, accompanied by a lot of volatility. Over the last couple of months, we presented our reasons for why we believed the stock market, as measured by the S&P 500, was due for another 5-10% pullback. While the current pullback that began on April 24 came as no surprise, the month long decline has exceeded our expectations with a peak-to-trough decline of 12%. Nevertheless, we continue to believe it is a pullback and not the start of a new bear market. This pullback is merely part of the higher volatility in the markets we have been expecting this year to accompany the transition from recovery to sustainable growth.

The market pullback has a number of drivers:

• Financial reform legislation has weighed on the Financials sector.
• China’s measures to slow growth have been raising fears that the sudden withdrawal of stimulus to one of the world’s biggest growth engines may be premature and tip the global economy back into recession.
• Last week’s decline in the Index of Leading Indicators, the first decline in a year, is a sign that economic growth may be slowing.
• However, the big issue affecting the market has been the debt problems in Europe and fear of another global credit crisis.

We expect the markets to rebound during the second quarter for the following ten reasons:

1. Although unlikely to improve much in the near-term, the European debt and deficit problems are unlikely to get much worse. The trillion dollar rescue package has been passed ensuring adequate capital to meet the financing needs over the next few years for Europe’s most troubled economies. Europe has some silver lining to the problems they are facing since the lower euro is a boost to the competitiveness of European exports helping to balance out weaker domestic growth.
2. The derivatives and leverage tied to the sovereign debt is very different than the financial crisis of 2008 (for example, debt-to-GDP (gross domestic product) for Greece is 1-to-1, while at Bear Stearns and Lehman Brothers it was 40-to-1). The smaller magnitude of the debt problem is unlikely to lead to another global financial crisis.
3. The concerns over the debt problems in Dubai and Iceland faded quickly after a month or two of intense concern last year. The budget and debt problems now weighing on Greece are an aftershock of the global financial crisis and not a sign of a new crisis developing. The problems are akin to what many people and businesses that overindulged during the credit boom are now experiencing, as the negative consequences of the global recession have forced belt tightening to try to make ends meet while restructuring debt. That is what happens at the end of a credit crisis and recession, rather than at the beginning.
4. Fortunately for investors, expectations for the Eurozone are low and do not need to be cut drastically leading to further declines in markets. For example, U.S. exports to Europe, European oil consumption, and Europe’s GDP are all already expected to be very low or negative.
5. The problems in Europe are good for the U.S. consumer by putting more cash in consumers’ pockets. The falling price of oil is pulling down gasoline prices as we head in to the peak demand summer driving season and the money flowing into Treasuries is leading to lower mortgage rates and a new wave of refinancing
6. As indicated by the LPL Financial Current Conditions Index, conditions remain favorable for growth.
7. Stock market valuations are now low at a forward price-to-earnings ratio of about 13 times. Also, the stock market is technically oversold by even more than it was overbought in mid-April when we were concerned about a pullback, suggesting selling may soon stall and buyers attracted by value will re-emerge.
8. China’s growth remains on track and the weakness in Europe may keep Chinese officials from invoking further measures to slow their economy in the second quarter.
9. Financial reform legislation may see a lot of changes to moderate it in conference before it is signed by the President, given some objections by the Fed and Treasury. This may help stabilize the Financials sector which has been one of the sectors that has led the stock market lower.
10. The outlook for The Federal Reserve (Fed) rate hikes may now be pushed out with the futures markets now pricing in the first hike not taking place until 2011

We still believe that while the next week or two could be up or down a little, four or six weeks from now stocks will be up and headed back near the highs of April.

What would change our minds? Not a level in the stock market, but a level on spreads and other indicators of contagion like borrowing rates in Europe and signs of bank stress. Material deterioration in indicators of contagion such as:

• The TED spread, a measure of stress in the banking system based on the willingness of banks to lend to each other, has risen this year to a slightly above average 35 basis points (bps), but remains well off of the crisis peak of 463 bps in 2008 and below the levels of 2008 that led up to the peak of the crisis in October 2008.
• The level of European interest rates and credit default swaps, which haveboth declined from the peak levels prior to the announcement of the rescue plan, but some southern European countries are elevated from levels at the start of the year.
• The value of the euro, which has fallen sharply this year but has stabilized in the past two weeks around $1.24.
• Corporate bond issuance, which has contracted sharply reflecting tighter financing conditions.
• The volume of central bank liquidity swaps, which has picked up reflecting the need for dollar-based financing overseas.

These factors would prompt us to re-evaluate our outlook and may warrant a more defensive investment stance.

For the Full Report Download Here

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.

Stock investing involves risk including loss of principal.

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. Investing in small-cap stocks includes specific risks such as greater volatility and potentially less liquidity.

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.
A basis point is a unit relating to interest rates that is equal to 1/100th of a percentage point. It is frequently but not exclusively used to express differences in interest rates of less than 1%.

See our Important Disclosures

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

What’s the difference between “billions” and “millions”? About 650 points.
Provided by Los Angeles Financial Planner, Rose Greene, CFP ®

Did a mistake make a selloff more severe? The Dow Jones Industrial Average settled at 10,520.32 Thursday after a 347.80 loss, with fears over European sovereign debt affecting Wall Street. Yet the 347.80 decline was just half the story.

The Dow also saw its greatest-ever intraday swoon Thursday, diving 998.50 below the open at one point and taking an intraday swing of 1,007 points._1,2

What happened? At this point, it looks like the same kind of thing that happened on Black Monday in 1987: technology and trading errors betrayed Wall Street.

That was “millions”, not “billions”! Citing multiple sources on May 6, CNBC and Reuters reported that a trader, possibly at Citigroup, mistakenly typed a “b” for billion instead of an “m” for million – apparently when authorizing a trade concerning Procter & Gamble. P&G shares fell 37% at one point (more than $22) before recovering to lose 3% on the market day._3,4,5

As the selloff gained momentum, some weird things happened Thursday. In a stretch of two minutes, 16 billion e-minis (futures contracts tied to the S&P 500) were sold. Accenture became a penny stock – no kidding, share values were showing up at $.01 on the New York Stock Exchange at one point. PG and 3M shares actually went below the “circuit breaker” level on the NYSE, freeing traders to purchase and sell shares of those companies on other exchanges. Clearly, technology was running wild._4,5,6

Trader Steven Rickard reacts in the S&P 500 futures pit at the CME Group in Chicago near the close of trading. (Associated Press, May 6, 2010)

Will trades be erased? Apparently some will be: Thursday evening, the NASDAQ announced it would cancel all trades of stocks whose prices moved more than 60% between 2:40-3:00pm EST on May 6. Just minutes after that news item, the NYSE said it would do the exact same thing.₇

What’s the lesson here? Don’t panic. Be patient. Don’t succumb to impulse when it comes to stocks. In the last few years, we have seen amazing market volatility AND amazing rebounds – and the resilient bull market we’ve seen has taught every investor that stocks can impressively snap back. Curse the technology that caused this swoon if you like, but keep fundamentals and diversification ever in mind.

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

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of the presenting Representative or the Representative’s Broker/Dealer. This information should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.. petermontoya.com, montoyaregistry.com, marketinglibrary.net
 
Citations
1 – money.cnn.com/ [5/6/10]
2 – cnbc.com/id/36988229 [5/6/10]
3 – cnbc.com/id/36999483 [5/6/10]
4 –money.cnn.com/2010/05/06/markets/markets_newyork/index.htm [4/29/10]
5- cnbc.com/id/36988229 [5/6/10]
6 – blogs.barrons.com/stockstowatchtoday/2010/05/06/no-ordinary-collapse-dow-snaps-back-from-1000-pt-drop/ [5/6/10]
7 – reuters.com/article/idUSN0614132620100506?type=marketsNews [5/6/10]

Why the crisis has Wall Street stressed.
Provided by Los Angeles Financial Planner, Rose Greene, CFP ®

It would be wonderful if the U.S. financial markets could “decouple” themselves from what is going on in Greece, Portugal and Spain. Unfortunately, the debt situation in these countries is like a ripple in a pond. The question is, how strong will the ripple ultimately be and will its full force reach our markets?

The problem. Greece, Spain, Portugal, Italy and Ireland are all carrying enormous debts. On May 1, the New York Times put up a chart breaking this down: Greece owes $236 billion, which believe it or not is the smallest debt among these five countries. Portugal’s debt stands at $286 billion – and it owes roughly a third of that to Spain. Spain carries around $1.1 trillion in debt, and its economy is in horrible shape (20% unemployment). According to the Bank for International Settlements, it owes $220 billion to France and $238 billion to Germany. Ireland has $867 billion in debt, with about 40% of that owed to the U.K. and Germany. Italy owes $1.4 trillion, including $511 billion to France (almost 20% of France’s GDP).₁

After the euro was launched, Greece had access to a whole bunch of cheap debt - and the country used it nonchalantly. In the years since the establishment of the euro, Greece’s debt-to-GDP ratio has remained repeatedly above 100%.2

Europe’s biggest banks are heavily exposed to these debts, and so are some of ours: names like Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley. In fact, these five banks have $2.5 trillion of cross-border exposure in the crisis, with Citigroup the most exposed. So you have potential risk to these banks, the euro, and the European and world economy.₃

The offer on the table. Fortunately, Greece has the chance to accept a $146.5 million bailout from the International Monetary Fund and the European Union in exchange for austerity measures (less government spending and a lower standard of living). This would help Greece avoid default – that is, having to renegotiate its debt and possibly assume more. (As a sovereign nation, Greece cannot go bankrupt.) Many economists think Greece will go into a deep recession (or depression) which could last most of the decade._2,4

The potential ripple. It looks like the bailout will be accepted by Greece and its EU partners. This means some confidence will return and other Eurozone nations with big debts will be slightly less threatened. However, Greece still has a risk of default.

Should Greece default even with the bailout, some major lenders in France and Germany would be hit very hard. They would have to raise capital ratios and reduce the frequency of loans. That would hamper economic growth in France, Germany and in turn across Europe. In coming months, the U.S. and other nations could feel the pinch from such a slowdown.₄

Keep in mind, Greece only represents about 2% of the Eurozone economy.2 In the roughest scenario, Spain or Italy defaults and the shock wave to European banks (and U.S. banks exposed to the debt) is significantly greater. What would happen then? A credit freeze across Europe? Diving stocks? A trashed euro? A flight to gold?

These are merely scenarios, not present realities – but in a nutshell, this is what had Wall Street biting its nails this spring.

So is the bailout truly a solution? It was unpopular throughout the EU, but the right step to take. The move certainly helped defend the stability of the euro; in fact, German Chancellor Angela Merkel and French President Nicholas Sarkozy have jointly pledged to preserve the euro’s value.₅

The worry is that other bailouts will be needed to preserve the fiscal health of other Eurozone nations. We all hope these

countries can effectively manage their debt levels, for the sake of the stock market and the economy in our country.

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

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of the presenting Representative or the Representative’s Broker/Dealer. This information should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information. petermontoya.com, montoyaregistry.com, marketinglibrary.net
 
Citations
1 – nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html [5/1/10]
2 – sfgate.com/cgi-bin/article.cgi?f=/g/a/2010/05/07/investopedia44011.DTL [5/7/10]
3 – msnbcmedia.msn.com/i/CNBC/Sections/News_And_Analysis/_News/__EDIT%20Englewood%20Cliffs/Bove2.pdf [5/5/10]
4 – marketwatch.com/story/greek-president-the-brink-of-the-abyss-2010-05-06?dist=countdown [5/6/10]
5- washingtonpost.com/wp-dyn/content/article/2010/05/07/AR2010050701987.html [5/7/10]
6 – csmonitor.com/USA/Politics/2010/0428/Republicans-relent-clear-financial-reform-bill-for-debate/%28page%29/2 [4/28/10]

Here’s an overview of the retirement plan landscape, excerpted from a special section on our website, “IRA Rollovers for Dummies“.
provided by Los Angeles Financial Planner Rose Greene, CFP®

All retirement plans are not the same. In fact, there is such a wide variety of retirement plans that it is worth it to read up on your choices. Here’s a brief look at the different plans and what they have to offer.

The Traditional 401(k). Most people have such a retirement savings plan, and it works like this. The plan is funded with pre-tax dollars taken out of your paycheck (through payroll deductions). If you’re lucky, your company will match your level of contribution or even make contributions on your behalf – after all, the employer contributions are tax-deductible. The I.R.S. will currently let you put up to $16,500 a year in a Traditional 401(k); COLA adjustments may drive that limit higher in the future.

The I.R.S. also allows catch-up contributions (additional contributions from those aged 50+), with a current annual limit of $5,500. In 2010, the total amount put into a 401(k) by you and your employer can’t exceed $49,000.₁

There are several variations on the traditional 401(k) theme …

The Safe Harbor 401(k). A byproduct of the Small Business Job Protection Act of 1996, the Safe Harbor plan combines the best features of the traditional 401(k) and a SIMPLE IRA, making it very attractive to a business owner. With a Safe Harbor plan, an owner-operator can avoid the big administrative expenses of a traditional 401(k) and enjoy higher contribution limits. The Safe Harbor plan allows for employers to make matching or non-elective contributions. Typically, employers match contributions dollar-for-dollar up to 3% of an employee’s income.₂

The SIMPLE 401(k). Designed for small business owners who don’t want to deal with retirement plan administration or non-discrimination tests, the SIMPLE 401(k) is available for businesses with less than 100 employees. Like a Safe Harbor plan, the business owner must make fully vested contributions (up to 3% of an employee’s income). But the maximum pretax employee contribution to a SIMPLE 401(k) is $11,500, and employees with a SIMPLE 401(k) can’t have another retirement plan with that company.₂

The Solo 401(k). Combine a profit-sharing plan with a regular 401(k), and you have the Solo 401(k) plan, a retirement savings vehicle designed for sole proprietors with no employees other than their spouses. These plans currently permit you to contribute up to $49,000 annually plus $5,500 in catch-up contributions for a total of $54,500 if you are 50 or older.₃

The Roth 401(k). Imagine a Traditional 401(k) fused with a Roth IRA. Here’s the big difference: you contribute after-tax income to a Roth 401(k), and when you reach age 59½, your withdrawals will be tax-free (provided you’ve had your plan for more than five years). The annual contribution limits are the same as those for a Traditional 401(k) plan.₄

You can roll Roth 401(k) assets into a Roth IRA when you retire – and you don’t have to make mandatory withdrawals from a Roth IRA when you turn 70½. With a standard 401(k), you have to roll over the assets to a traditional IRA and make the required withdrawals.₄

The DB(k). The DB(k) is a defined benefit retirement plan with some of the features of a 401(k). Companies with fewer than 500 employees are starting to put them into place. They offer plan participants a retirement savings plan with the potential for a small income stream in the future, mimicking the pensions of years past. The pension income equals either a) 1% of final average pay times the number of years of service, or b) 20% of that worker’s average salary during his or her five consecutive highest-earning years._5,6

And then there are SEP-IRA, SIMPLE IRA and Keogh plans …

The SEP-IRA. This employer-funded plan gives businesses a simplified vehicle to make contributions toward workers’ retirements (and optionally, their own). The employer contributions are 100% vested from the start, and the employer can supplement the SEP-IRA with another retirement plan. In 2010, these plans have a $49,000 maximum contribution limit, and an individual’s personal contribution limit depends on such factors as service, performance, and salary. These plans don’t permit catch-up contributions._3,7

The SIMPLE IRA. This is like a SIMPLE 401(k) – a small business retirement plan with mandatory employer and optional employee contributions and a current $11,500 annual contribution cap. But in this plan, there is one big difference for the business owner. If the business is not doing well, the owner can reduce plan contributions. The employer contributions are still 100% vested from the beginning, and $2,500 catch-up contributions are currently allowed for employees 50 and older._3,8

The Keogh Plan. The Keogh is designed for small unincorporated businesses. There are defined benefit, money purchase and profit-sharing variations; the defined benefit variation is a qualified pension plan offering a fixed benefit amount. In 2010, the annual contribution limit for a profit-sharing Keogh is $49,000.₉

Did you know you had so many choices? If you are an employer, you may not have realized you have such an array of choices in retirement plans. But you do, and asking the right questions may represent the first step toward implementing the right plan for your future or your company. Be sure to ask a qualified financial advisor or business retirement plan consultant about your options today.

For more information, visit a special section on our website called IRA  Rollovers for Dummies. Still confused? Call Rose at 310.3991200 and she’ll answer all your questions.

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

1 smartmoney.com/personal-finance/retirement/got-a-401k-question-13841/ [2/2/10]2 irs.gov/retirement/article/0,,id=119625,00.html [1/5/10]3 turbotax.intuit.com/tax-tools/tax-tips/tax-planning-and-checklists/5438.html [4/19/10]4 smartmoney.com/personal-finance/retirement/understanding-the-roth-401k-17679/ [2/2/10]5 kiplinger.com/businessresource/forecast/archive/DBk_pension_of_future_090819.html [8/19/09]6 bankrate.com/finance/retirement/where-to-find-income-for-retirement-1.aspx [3/9/10]7 irs.gov/retirement/article/0,,id=111419,00.html [2/3/10]8 irs.gov/retirement/article/0,,id=111403,00.html [10/16/09]9 moneycentral.msn.com/quickref/quickref.asp?cat=10&qamode=2&reftype=0&selcat=6&sub=4&topic=5 [4/19/10]

A closer look at a long-popular option.
provided by Los Angeles Financial Planner, Rose Greene, CFP®

Variable annuities are being reintroduced to a broader audience. These tax-deferred savings vehicles are getting a second look – a new look – from pre-retirees and retirees who want more income for their futures.

All annuities have things in common. An annuity is a contract between you and a life insurance company that promises you lifelong income in exchange for a lump sum payment or series of payments to the insurer. The income arrives in periodic payments, either at once (an immediate annuity) or in the future (a deferred annuity, which also offers you tax-deferred growth of the assets inside it).₁

These tax-deferred savings vehicles are getting a second look – a new look - from pre-retirees and retirees who want more income for their futures.

The limitations of a fixed annuity. In a fixed annuity, your money grows at a fixed rate. At first that kind of financial predictability sounds wonderful, but there are two problems that come with it. One, your rate of return might be meager compared to what you could earn in the stock market. Two, inflation is going to make that fixed return worth less and less with the passing years, unless you pay (possibly through the teeth) to have the rate of return adjusted.

The variable annuity difference. In a variable annuity, you may direct part of your contributions to mutual fund-like subaccounts. The assets in a subaccount may be allocated across a mix of stocks, bonds and money market funds. The payout stream of the annuity reflects the performance of the subaccounts. Some variable annuities are called index annuities, because they are keyed to the performance of a major stock index, such as the S&P 500. (Incidentally, administrative fees on variable annuities can be lower than those charged on fee-based accounts.)

The strengths of a variable annuity. Many variable annuities let you benefit from stock market gains while shielding you against stock market losses. In the past, many have offered the annuity holder at least a minimum rate of return (a GMIB, or Guaranteed Minimum Income Benefit). Many have also offered guarantees that the annuity value will not dip below the value of the initial principal (a GMAB, or Guaranteed Minimum Accumulation Benefit).₂

In addition to “living benefits” of this sort, variable annuities don’t have contribution limits like a 401(k) or an IRA – you can pour as much money as you want into one. You also aren’t required to take money out at age 70½, as with a traditional IRA.₃

Also, variable annuity assets aren’t simply poured into an insurance company’s general fund (as is often the case with a fixed annuity). That’s useful if the insurance company hits a financial snag – you don’t want them diverting or borrowing your money for some other use. (However, the “living benefits” on a variable annuity are usually paid from an insurer’s general account.)₄ Variable annuities are SEC-regulated.₅

Interesting options. As they are insurance products, variable annuities can include or be structured to include GMIBs, GMABs, long term care insurance options and even bonus credits, in which the insurer adds a small percentage bonus to any contributions you make to the annuity. An impressive 96% of variable annuities sold in 2008 included guaranteed life benefits of some kind.₆

There is naturally an insurance benefit: should you die before the annuitization phase begins (that is, before you start receiving income from the annuity), your designated beneficiary is guaranteed to receive the dollar value of what you have contributed to the annuity, or some guaranteed minimum (sometimes defined as all prior purchase payments made with any prior withdrawals subtracted).₇

If you’d like to know more about variable annuities, talk to a qualified insurance or financial professional today.

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

These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

Citations.

1 investopedia.com/articles/04/111704.asp [11/17/04]
2 investopedia.com/articles/retirement/08/variable-annuity.asp [2008]
3 thestreet.com/story/10438425/2/deathmatch-iras-vs-annuities.html [9/19/08]
4 nydailynews.com/money/2009/05/05/2009-05-05_is_your_annuity_or_life_insurance_policy_safe.html [5/5/09]
5 finra.org/Investors/ProtectYourself/InvestorAlerts/AnnuitiesAndInsurance/p006045 [5/5/09]
6 ifawebnews.com/2009/04/07/survey-nearly-all-variable-annuities-include-guaranteed-life-benefits/ [4/7/09]
7 sec.gov/investor/pubs/varannty.htm#dben [6/12/09]

How will this impact the real estate market?  
provided by Los Angeles Financial Planner, Rose Greene, ®

The Fed pulls out of the mortgage market. On March 31, 2010, the Federal Reserve halted its 15-month-long program to buy up toxic mortgage-linked securities.1 Of all the things the Fed did to try and heal the economy and financial markets, this may have been its most crucial move. It was March 2009 when the program really began to get rolling. Guess when the current bull run began on Wall Street?

In purchasing about $1.25 trillion in mortgage debt, the Fed held interest rates on conventional home loans down, creating a golden opportunity for anyone who could refinance. Looking at Freddie Mac data, rates on 30-year FRMs were averaging 6.08% in November 2008 (when the Fed announced the program) and 4.97% in March 2010.₂

The Fed has hinted it would be open to buying more mortgage debt if economic conditions demand – but with the economy healing by most measures, it feels no compulsion to extend the campaign any further.₁

So will mortgage rates zoom north now? Well, that was what many economists feared, with potentially miserable repercussions for the housing sector. So far in 2010, we have not seen rates climb measurably upward, even with the Fed flashing signals that the effort would be wrapped up.

If you listen to National Association of Realtors chief economist Laurence Yun, the sun is out. “Just as the Fed is stepping out, private investors appear to be stepping in,” he commented last month. “As long as there are buyers on Wall Street for mortgages, it should have no impact on consumers.” He did concede that “macroeconomic forces” could drive rates higher as 2010 continues.₁

On the other hand, Michael Fratantoni, a vice-president at the Mortgage Bankers Association, sees some clouds. “Home sales really are running at quite a slow pace, and we haven’t seen much of a spring buying season yet, so there haven’t been a lot of mortgages originated or securities issued,” he told the New York Times. He thinks rates on FRMs could average 5.8% or so by 2011.₁

Will the effect be mild? If you ask a real estate industry analyst what the biggest pain to the housing market is right now, he or she will probably cite unemployment, not reduced availability of credit. Joblessness is stopping mortgage payments and home purchases more than anything else. The stock market reacted tamely when the Fed bumped up the discount rate in March, and many economists think mortgage rates won’t move very much in the near term.

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

This material was prepared by Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
www.montoyaregistry.com, www.petermontoya.com

Citations.
1 nytimes.com/2010/04/01/business/01fed.html [3/31/10]
2 freddiemac.com/pmms/pmms30.htm [4/2/10]

Quote of the week.

“Nothing in life is to be feared. It is only to be understood.”– Marie Curie

Reforms become law. President Obama signed his long-envisioned health care reforms into law on March 23, and he will sign the amendments to the bill into law on March 30. Most of the major changes will take effect in 2014, when health insurance will become compulsory for nearly all Americans. New taxes will help fund the reforms. The Congressional Budget Office estimates that the modifications will cut the federal deficit by $118 billion by 2020._1,2,3

Home sales still underwhelming. Existing home sales dipped 0.6% for February while new home sales slipped 2.2% to another all-time low (although data only goes back to 1964). Any positives in the new Commerce Department report? Yes. The median sale price of new homes was about 5% above where it was a year ago.₄

A gain in durable goods orders. The 0.5% rise in February was accompanied by news that durable goods inventories increased by 0.3%, the best such gain since December 2008.₅

USDI surges north. When the U.S. Dollar Index is up 1.10% for the week (and 4.82% for the month), what happens with gold and oil? Well, gold and oil prices respectively fell 0.30% and 1.20% last week, with crude futures at exactly $80.00 per barrel at Friday’s close on the NYMEX.₆

Source: CNBC.com. BigCharts.com, usteas.gov, bls.gov, 3/26/10)8,9,10. Indices are unmanaged, do not incur fees or expenses, and cannot be invest into dircetly. These returns do not include dividends.

S&P 500 climbs 5.62% in 4 weeks. Stocks had another fine week from March 22-26, with the NASDAQ advancing 0.87%, the Dow 1.01% and the S&P 500 0.58% as part of a great 4-week run.₇

Riddle of the week. Two-and-a-half artists spend two-and-a-half hours painting two-and-a-half models on two-and-a-half canvases. How many artists would be necessary to paint 24 models on 24 canvases in 20 hours?

Contact my office or see next week’s Update for the answer.

Last week’s riddle: Is there a number made of eleven tens of thousands, eleven thousands, eleven hundreds and eleven units? If so, what is it??

Last week’s riddle answer: Yes – the number is 122,111. 110,000 + 11,000 + 1,100 + 11 = 122,111.
___________________________________________________________________
Rose Greene is a Registered Representative with, and securities are offered through LPL Financial, Member FINRA/SIPC.

This was prepared by Peter Montoya Inc., and not the presenting Representative or the Representative’s Broker/Dealer, and should not be construed as investment advice. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. www.montoyaregistry.comwww.petermontoya.com

Citations.

1 nytimes.com/2010/03/23/health/policy/23health.html?ref=us [3/23/10]
2 voices.washingtonpost.com/44/2010/03/obama-to-sign-health-care-fixe.html?wprss=44 [3/26/10]
3 cnn.com/2010/POLITICS/03/21/health.care.main/?hpt=Sbin [3/21/10]
4 foxbusiness.com/story/markets/industries/industrials/february-new-home-sales–annual-rate/ [3/24/10]
5 reuters.com/article/idUSN239670720100324?type=marketsNews [3/24/10]
6 cnbc.com/id/36057788/page/2/ [3/26/10]
7 blogs.wsj.com/marketbeat/2010/03/26/data-points-us-markets-221/ [3/26/10]
8 bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=DJIA&close_date=3%2F26%2F09&x=0&y=0 [3/26/10]
8 bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=COMP&close_date=3%2F26%2F09&x=0&y=0 [3/26/10]
8 bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=SPX&close_date=3%2F26%2F09&x=0&y=0 [3/26/10]
8 bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=DJIA&close_date=3%2F25%2F05&x=0&y=0 [3/26/10]
8 bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=COMP&close_date=3%2F25%2F05&x=0&y=0 [3/26/10]
8 bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=SPX&close_date=3%2F25%2F05&x=0&y=0 [3/26/10]
8 bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=DJIA&close_date=3%2F27%2F00&x=0&y=0 [3/26/10]
8 bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=COMP&close_date=3%2F27%2F00&x=0&y=0 [3/26/10]
8 bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=SPX&close_date=3%2F27%2F00&x=0&y=0 [3/26/10]
9 ustreas.gov/offices/domestic-finance/debt-management/interest-rate/real_yield.shtml [3/26/10]
9 ustreas.gov/offices/domestic-finance/debt-management/interest-rate/real_yield_historical.shtml [3/26/10]
10 treasurydirect.gov/instit/annceresult/press/preanre/2000/ofm11200.pdf [1/12/00]