Monthly Archives: December 2010

New FINRA Investor Education Foundation Site Compares Financial Capability by State

The FINRA Investor Education Foundation recently launched to unveil the results of the nation’s first State-by-State Financial Capability Survey.

The new website displays a clickable map of the United States and allows you to dive in and compare the financial capabilities of Americans in every state. You can compare your state’s data to others, or to national and regional averages. Plus, you can see how your financial knowledge stacks up to the national average by taking the Financial Capability Quiz.

Financial capability of adults in Massachusetts can be measured by focusing on four key components

Making Ends Meet. 21% of individuals reported that over the past year, their household spent more than their income.

Planning Ahead. 56% of individuals lack a “rainy day” fund to cover expenses for three months, in case of emergencies such as sickness, job loss or economic downturn.

Managing Financial Products. 16% of individuals reported using one or more non-bank borrowing methods in the past five years.

Financial Knowledge and Decision-Making. On average, individuals answered 3.1 out of five financial literacy questions correctly. In addition, 62% of individuals said that, when obtaining their most recent credit card, they did not collect and compare information about cards from more than one company.

Young Americans nationally were more likely to be less fiscally responsible than older Americans, and were significantly more likely to engage in non-bank borrowing.

The Municipal Market Sends a Message: Know What You Own!

Sean P. Simko of SEI’s Fixed Income Portfolio Management team writes in a recent SEI commentary: The Municipal Market Sends a Message: Know What You Own!
The municipal market continues to be the focus of negative press, with the most recent example coming from the CBS TV show 60 Minutes. There are a lot of numbers being thrown around regarding defaults, bankruptcies, tax revenues and funding needs. Some of those numbers may be accurate, while others can be a bit misleading. This scenario highlights the importance of knowing what you own.

The municipal market is a $2.8 trillion market. As with any market, you have a variety of issuers commanding varying levels of credit ratings ranging from high-quality to junk. Yes, there are certain regions, states and municipalities that are under tremendous pressure from funding gaps driven by softer-than-expected tax revenues. The list of names should not be surprising; California, Arizona, Nevada, Illinois and Rhode Island are a few of the states that have held positions in this category for quite some time. However, there are also regions, states and municipalities that are rock-solid. The challenge for investors is to separate the strong from the weak.

Consider it this way: There are more than 50,000 municipal issuers within the United States.(1) If there are 100 municipal defaults in the marketplace, it would equate to a default rate of less than one quarter of a percent. While the sector is still subject to credit pressures, we feel that the recent headlines have overblown the situation. The increased volatility is more liquidity- and supply-driven than credit-driven. With the termination of the Build America Bonds (BAB) program, state funding costs will go up. This will add pressure to spreads, as will the onslaught of tax-exempt issuance in lieu of the BAB program. The situation around state and municipal credit remains elevated, but has not significantly changed. Therefore, we are not expecting a sharp increase in defaults or bankruptcies. Municipal market investors may be faced with bankruptcies and/or defaults in 2011 from lower-quality issuers, but these problems do not mean there will be widespread losses that extend to higher-quality issuers.

A more realistic problem than widespread default is the potential for panic within the market that could create forced selling by fund managers that locks in losses. Investors who own municipal securities within a separately managed account do not have to worry about forced selling caused by other investors, as monies in a separate account are not comingled. Mark to market (2) is also not an issue if the strategy experiences little to no turnover. Ladder and barbell strategies, (3) for example, are designed to weather volatile or troubled markets over a long-term time horizon.

Municipal-market concerns are not going away any time soon, and are likely to remain in the headlines for years to come. It is important to keep the headlines in perspective, separating reality from the possibility (or probability) of a doomsday scenario. That said, there is no reason to panic if the proper due diligence (including a full credit review) is executed. The expectation over the near term is that the vast majority of municipal issuers will make timely debt-service payments, consistent with the low-default experience seen in this sector over the last sixty years. However, the unprecedented stress on this sector is likely to produce defaults at a higher rate than we have seen in the past. We expect to mitigate this risk in our portfolios* by remaining highly diversified through the acquisition of high-grade credit within sectors which we feel will provide less volatility.

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for educational purposes only.

There are risks involved with investing, including loss of principal. No mention of particular securities should be construed as a recommendation or considered an offer to sell or a solicitation to buy any securities.

SEI Investments Management Corporation or its employees may sometimes hold positions in the securities discussed here.

SEI Fixed Income Portfolio Management is a unit of SEI Investments Management Corporation, which serves as the investment advisor.

*SEI Fixed Income Portfolio Management manages fixed-income strategies for SEI’s Managed Account Program (MAP).
1 Source: U.S. Securities and Exchange Commission is also not an issue if the strategy experiences little to no turnover. Ladder and barbell

2 Mark-to-market (MTM) accounting attempts to assign a current market value to an asset, usually on a daily basis. This measurement can cause issues, however, if it does not provide a realistic appraisal of the asset .
3 Ladder and barbell (and also bullet) strategies are designed to balance the effects of interest-rate fluctuations in bond portfolios, mainly through a calculated structuring of maturity dates.

Economic Update:Economic Recovery 2010 Part 2- Is the Glass Half Empty or Half Full?

Recently with the assistance of SEI Investments, we prepared an updated economic update titled: Economic Recovery 2010 Part 2- Is the Glass Half Empty or Half Full?
This presentation is best seen in the video link embedded here. In case you are not able to play it- the script follows.

First I want to provide an overview of the current market conditions

Next, consistent with the title of this presentation – is the glass half full or half empty — we’re going to look at the economy from two perspectives.

First we’ll address some very good reasons to be optimistic. But in spite of those encouraging signs, there are reasons for caution. We want to make sure you get the full picture.

Finally, we’ll offer some ideas on how all of this impacts you as investors.

Let’s start with some good news. As you know, you can’t be sure there is a recession until it’s well underway and you’re not sure it’s ended until well after the fact.Now let’s look at some reasons for us to be optimistic, beginning with GDP or Gross Domestic Product, which is a measure of the total goods and services produced in the United States in any given period. This chart shows annual GDP since 1981 through second quarter 2010.

The National Bureau of Economic Research declared recently that the recession, which started in December 2007, ended in June 2009. That’s 18 months – a record – as you can see from this graph.

Not only has the recession ended, but so has the post-recession rebound we saw in 2009. We are now in a period of slow economic growth. The recession was sufficiently deep and long that coming totally out of it will take some time. We enjoyed a quick rebound last year and now we face what appears to be a long, slow and sometimes bumpy ride to a full recovery.

The good news is that while the growth is slow – there is, indeed, growth!

It’s also clear that a double-dip recession – feared by some economists earlier this year – although possible, is not likely.

Look where GDP dropped off sharply in 1982, 1991 and 2001. Each of those down years was followed by sharp increases in GDP. Historically, that’s been the pattern: sharp declines in production are generally followed by rapid improvement.

Look at the last few years. GDP has been dropping steadily since 2004 and took a sharp turn south in 2008. In 2009 it began to turn around and we’ve now experienced four consecutive quarters of economic growth. Granted, that growth has slowed in the last two quarters, but we ARE growing. I think that’s the message here.

Next, let’s look at manufacturing. This chart shows the Purchasing Managers Index, which is a very reliable measure of manufacturing activity. Purchasing and supply managers for manufacturing firms are surveyed about their purchasing activities to measure their pessimism or optimism.

A score of 50 or above for the Purchasing Managers Index means that a majority of the managers are optimistic and have increased their purchasing because they anticipate increased orders and business expansion.

As you can see from this graph, the results from September 2009 to August 2010 are all above 50. That’s 13 consecutive months of growth in manufacturing. That bodes very well for our economy and eventually the creation of new jobs.

There is also good news to be gleaned from the financial markets. Equity markets have rebounded from their first quarter doldrums and the bond markets have been consistently strong this year.

The good news is that the worst fears about foreign markets – especially in Greece and Spain – appear to be behind us. Europe, which appeared very unstable six months ago, appears to have stabilized, including the banks, which recently passed their stress tests.

Our focus on foreign and emerging markets underscores the evolving nature of our global economy. The United States is no longer an isolated nation who controls its own economic fate. The global markets have become too interdependent for that. A return to full economic health in the United States will be a function of a broader recovery in places like Europe, Asia and the Americas.

Now let’s look at the glass from the other perspective.

For every piece of good news, there is bad news, especially in the job market. Unemployment, a trailing indicator, is stuck at high single digits. It was 9.6% in September, unchanged from June. Granted it’s down sharply from the crisis levels of 2008 and early 2009, but not anywhere close to acceptable.

What we’re hearing about job creation is to not expect a lot of improvement, at least over the next six to 12 months. The pace of economic growth is sufficiently slow that any meaningful growth in jobs will be hard to come by, until the second half of 2011 or even 2012.

Also holding the economy back is the lack of improvement in the housing market. There are any number of ways to look at the market, including new construction, the sale of existing homes and the price of newly built homes.

These tables show the prices for existing homes. Look at the top table first, and you can see the catastrophic drop in home values from 2007 to 2009.

Now look at the bottom table, which shows prices and the percentage change from August 2009 to July 2010. You can see a steady drop in values from August 2009 through April 2010, although the pace slowed considerably.

In April, we got a nice bump (3.9%), but it’s been almost flat since then. So it appears that the market for existing homes has hit bottom, but we have yet to see any meaningful improvement.

We’re going to be watching that too going forward.

There’s another thing we need to keep an eye on as the economy works its way through recovery – the possible expiration of the Bush tax cuts.

The Obama Administration is proposing major revisions to the tax code that will have a meaningful impact on a broad section of American taxpayers, especially those in higher income brackets.

As we look at the table, you’ll see the reduction in marginal tax rates that were implemented in 2001 and 2003. On the right you’ll see the proposed changes to those taxes.

First, the plan is to roll back tax cuts affecting high-income taxpayers — couples earning more than $250,000 and single filers earning more than $200,000. Additionally, the top two tax rates would increase from 33% and 35% to 36% and 39.6% respectively.

Other proposed changes include:

• Reducing personal exemptions for couples earning more than $250,000.

• Increasing the 15% rate on capital gains and dividends to 20% for taxpayers in the top two tax brackets.

• Eliminating some exemptions on estate taxes.

Clearly these proposed changes will impact the recovery and your financial plans. Fortunately, your advisor can help you manage your taxes, especially those on capital gains and dividends. I encourage you to talk to your Trusted Financial Advisor about this if you haven’t already.

So we’ve looked at the glass as half full and as half empty. We’ve pointed out that there are reasons to be optimistic and there are reasons for us to be more cautious.

We need to recognize that economic growth will come stubbornly for the remainder of the year.

That fact has consequences for the job market. Due to the slowing pace of economic expansion, we’re not likely to see significant job growth until the second half of 2011 or even 2012.

So is the glass half full or half empty? I’ll let you decide for yourself. But I prefer to look at things positively, so while we need to be cautious, it’s reasonable to have faith in the resilience in the economy and an eventual return to full economic health.

Regardless, I’d like to remind you that you’re not alone in sorting through this. I’m here to address your concerns and to keep you on track. If you haven’t already, I can help you review your goals, reexamine your risk tolerance and encourage you to remain invested for the long term.

Thank you and I look forward to speaking with you soon. 