Our Recent Commentaries

  

Bernie’s Commentary
April 21, 2010
 
Most of our client meetings begin with a brief discussion about the economy and the markets. Since the second quarter of 2010 is underway and the stock markets continue their journey upward, I want to share some of our thoughts. Most of you have heard us say that we do not feel that we are in the next great bull market and a cautious approach is necessary. I am the first to say that I do not know which direction the market is headed, but given the latest rally, I do believe that the stock markets can no longer be considered undervalued. The S&P 500 has increased nearly 80% since March 9, 20091. In our opinion, some of the reasons for this rally are as follows:
 
-         Earnings have been better than expected
-         The government stimulus plans have aided consumer spending
-         Money markets are yielding very little interest and investors realize that the potential   rise in interest rates make bonds less attractive. This makes equities a more attractive option.
-         The global financial system has improved after teetering on the brink of collapse
 
In addition, the consumer sentiment has improved and while still weak, the purchasing index is improving. 
 
This is where our caution comes into play. Assuming that our global economy was perfect, this rise in the markets has still been too fast and too high. Historically, great bull markets begin when Price/Earnings2 ratios are in the single digits. As of 3/31/10, the P/E ratio of the S&P 500 was 18.3. Earnings would need to fall or equity prices correct to move towards single digits. A few other causes for concern are as follows:
 
-         High unemployment
-         A primary factor in higher earnings pertains to cost cutting. You can’t cut costs forever without quality suffering.
-         The US is drowning in debt
-         The stimulus plans/government spending will need to stop at some point
-         The commercial real estate market is deteriorating
 
We are not overly optimistic or pessimistic, especially since the markets can be very unpredictable. Oftentimes we see the markets move in the opposite direction from where the economic indicators would lead. For this reason, we believe every portfolio should have an appropriate mix of strategies which may outperform during both bull and bear markets. It appears to us that the easy returns achieved since March ‘09 will be more difficult to realize moving forward. Therefore, we believe that active management3 and the focus on investing based on fundamentals will be increasingly important. Our open architecture style of investing allows us to react quickly and gives us the ability to adapt to changes in the markets, as well as your financial situation. We will be in touch on an individual basis if we believe any changes are in order.
 
 
 
1 BusinessWeek “After 79% Jump, Are Stocks Still Cheap?” April 22, 2010
2 Price/earnings (P/E) ratio if the most common measure of how expensive a stock is. The P/E ratio is equal to a stock's market capitalization divided by its after-tax earnings over a 12-month period, usually the trailing period but occasionally the current or forward period.
 
3 Active managers rely on analytical research, forecasts, and their own judgment and experience in making investment decisions on what securities to buy, hold and sell.
 
 
 
Bernie’s Commentary
March 29, 2010
 
 
We are all familiar with the basic principals of investing – over the long haul proper asset allocation makes up 91% of portfolio returns[1], don’t chase last year’s winners, and don’t make investment decisions solely based on the tax impact. While these are still good principals, we believe that the tax impact of investing will become more important in your overall wealth management plan. Don’t be surprised to see it as an agenda item in our future meetings.
 
At the end of 2010, several of the 2001 & 2003 Bush tax cuts will go away or “sunset.”[2] In a robust economy, the federal government could have extended them for several more years to avoid increasing taxes. However after the economic meltdown over the past two years and the shrunken tax base due to unemployment, lower real estate tax revenue, and belt-tightening in the consumer market, it is difficult to maintain these low taxes. Increased government spending was needed to keep the economy afloat and I think we all knew that would have tax consequences in the future. 
 
As it pertains to personal financial planning, the sunset of the Bush tax cuts and the proposed taxes to support healthcare reform could be a double whammy for many. The 2001 & 2003 tax cuts lowered income tax rates and lowered the highest capital gains rates on investment income to 15%. When those regulations sunset, income taxes will rise and the capital gains tax rate will increase to 20%.2  
 
In the proposed new healthcare law the Medicare tax will no longer be drawn solely from earned income. Beginning in 2013, investment income including interest, dividends, and capital gains will be subject to the Medicare tax for those individuals with gross income over $200,000 and joint filers over $250,000.[3] This will affect most of our clients and will require more ongoing strategic planning for everyone. Our goal is to work with our clients and their accountants to help minimize tax burdens.  
 
In the future, we may see a greater emphasis on tax-deferred investments and increased retirement plan contributions. For those in the distribution phase, there will be a greater concentration on where to draw their retirement income. It may also impact the investment strategies used in estate planning. Additionally working with your accountant will be a year-round endeavor to help keep up with the changing tax laws. 
 
As the healthcare reform laws are still being finalized, we don’t have all of the specifics yet, but we are researching how they may affect your overall wealth management plan. We want your wealth management plan to be properly structured and have the flexibility to adapt to change. Please contact us if you would like to discuss these issues further. We are also more than happy to receive an introduction to a friend or colleague who may have been a “do-it-yourself” investor and may now want to discuss their situation with an outside professional. Thank you for your continued trust in our firm.

 

[1] Brinson Singer Beebower – 1991
[2] EGTRRA (Pub.L. 107-16, 115 Stat. 38) & JGTRRA (Pub.L. 108-27, 117 Stat. 752)
 
[3] Patient Protection & Affordable Care Act, March 23, 2010
  
 
 
 
 
 
Bernie’s Commentary
February 2, 2010
 
 
2010 has begun with some of the market choppiness that we expected in 2009, therefore we thought it would be appropriate to share some thoughts from our recent investor committee meeting. As most of you know, we attend quarterly investor committee meetings to hear different viewpoints from our portfolio strategists, discuss trends in the economic environment, and stay in tune with the constant changes in our industry. This ongoing research and communication helps us design and adjust your portfolio to help you meet your goals.
 
Over the past few quarters, Risk has been rewarded more than Risk Management.This is typical in an up-market. The more defensive “Rowing“ strategies (Tactical Unconstrained and Absolute Return) have recently underperformed relative to the “Sailing” strategies which maintain a certain target equity allocation (Strategic and Tactical Constrained).1 This should come as no surprise as equity prices have been increasing since March 2009. When we see the next correction in the equity markets, we would expect the “Rowing” strategies to outperform as they have more leeway in their allocations and can be considered more defensive.
 
In our discussions with the different portfolio strategists, we evaluate their investment convictions for the short and long-term direction of the markets. We recognize that different strategists may have contrasting opinions which can be largely impacted by their particular style of investing. Please remember that no one can tell you with absolute certainty the near term direction of the markets. Therefore, when constructing portfolios, we are believers that implementing different strategies within an investment portfolio can provide diversification2 and help smooth out the market volatility over time. As your life goals and the economic environment change, we have the ability to make adjustments to portfolios quickly and without additional fees.         
 
As we plan for 2010 and beyond, we believe there is a greater need for financial planning and wealth management. We want to add more value to our relationships by discussing important issues such as the new Roth-IRA conversion rules and the reinstatement of the Required Minimum Distribution after Congress allowed a one year reprieve. These issues may impact your wealth management plan one way or another. As a reminder, we welcome the opportunity to discuss these issues with your CPA or estate attorney to see how certain scenarios impact your individual financial picture. If you are not working with a CPA or estate attorney, we are happy to make an introduction when appropriate.   
 
Lastly, we have terrific news to report at Bernard Wolfe & Associates. We are pleased to announce that both Samantha Fraelich and Brian McGuire passed the  Certified Financial PlannerTM professional exam that they took in November. Upon final certification, they will join Bernie, Brad and Glenn in making our entire investment team CFP® certificants. We believe this puts our firm in a stronger position to provide high end guidance to our existing clients as well as increase our capacity to add new client relationships through your introductions. As always, we appreciate the trust you place in our firm. 
 
 
 
1 A Strategic Asset Allocation approach creates a mix of equities, fixed income, and cash designed to capture broad capital market returns while balancing risk and volatility. The goal of this approach is to put the positive winds of “sailing” markets to work in your portfolio.
 Tactical Constrained Asset Allocation approaches attempt to capture broad market returns while also seeking to take advantage of shorter-term opportunities or mitigate risk through moderate allocation shifts. This approach may also put the positive winds of “sailing” markets to work in your portfolio, but it also creates the potential for the portfolio strategists to add additional value through active, near term allocation decisions.
 Tactical Unconstrained Asset Allocation approaches remove the limits on the extent and frequency of allocation shifts allowing the portfolio strategist to move more aggressively in response to changes in their outlook. This approach can provide flexibility for “rowing” markets when headwinds place a premium on active asset class management
 Absolute Return Asset Allocation strategies are for risk-averse investors comfortable with modest returns in exchange for highly active risk management that may include frequent allocation shifts, non-traditional asset classes and/or alternative strategies. This strategy may be used for attempting to “row” toward your goals regardless of the stock market’s direction.
 
2 Diversification does not protect against the loss of principle due to market fluctuations. It is a method used to help manage investment risk.
 
 
Bernie's Commentary
December 16, 2009 
 
 
As 2009 comes to a close, our economy seems to be improving, albeit very slowly. At this time last year, many were unsure that our financial system was even going to stay afloat. We are thankful that the system hasn’t fallen off a cliff. As many of you know throughout our conversations and recent commentaries, we do not believe the recent run up in the markets to be a signal of the beginning of the next great bull market. While we hope it is smooth sailing from here, we are not overly optimistic in the short-term. Expectations should be kept in check as we do believe our economy has a long way to go.
 
We want to take this time to thank you for the trust and loyalty you’ve shown us, especially over the last 12-18 months. We look forward to focusing on your goals and objectives as we plan for 2010 and beyond. Our entire staff wishes you and your family a Happy and Healthy Holiday Season!       
 
 
 
 
 
 
Bernie’s Commentary
November 1, 2009
  
 
I thought this was a good time to discuss our interpretation of the signals we are receiving from the economy. The million dollar question still remains, what will the recovery look like? Some are predicting a powerful recovery that will create new wealth.  Others are predicting a slow return to growth that could be spoiled by a “double-dip” or “W-shaped” recession. At Bernard R. Wolfe & Associates, we do not have a crystal ball, but we highly doubt the powerful recovery theory and truly hope we do not see a “double-dip” recession.
 
One thing we know for certain is that investors are still hurting. The US and global economies are still in serious condition, but they are no longer in “grave” condition.  More than likely, this is the reason behind the recent stock market surge rather than the idea of a booming recovery. A large part of our professional role as wealth management advisors is to manage expectations. No investor should expect the returns that we all experienced in the good old days. We believe there has been a significant break in the growth pattern investors may have enjoyed in the past. Bill Gross of PIMCO says it is due to “DDR” delevering, deglobalization and reregulation. The consumer savings rate is nearing an all-time high and their spending is on the way down1 - this usually results in a slower growth rate for our economy. Credit is still difficult to get, and along with the increased savings by the consumer, a delevering process of our economy has begun. This also lowers the growth rate of the economy.  The laissez-faire attitude has been replaced by the iron fist of the government. The government in the past has been the referee. Today they are in the game.  Don’t get me wrong, we believe that there was no other viable solution. However, if our government overstays its welcome, there could be serious consequences for future growth opportunities. Some say we are on the path for deglobalization – a more US-centric economy. If so, this could lead to protectionism.  Typically, high tariffs have never been a positive for growth.
 
Here at Bernard R. Wolfe & Associates, we are proceeding with caution. The asset allocation models we utilize are now a combination of “rowing” and “sailing” strategies. We believe this flexibility allows us to better navigate through a volatile environment. Simply put, there are “sailing” markets when the prevailing economic winds drive strong bull market returns, as well as “rowing” markets when bear market headwinds and choppy waters require more active management. If we had the magic formula and knew what the future held for all of us in regards to investment results, we would be able to go all sailing or all rowing.  The investment portfolios we utilize are tailored and structured to the needs of each individual client, rather than trying to beat an arbitrary index such as the S&P 500 over a period of time. In our opinion, those financial advisors who continuously focus on trying to outperform certain indices often take far more risk than necessary. This can be very dangerous in this type of economy. We are more interested in helping you reach your personal financial goals.
 
Going forward, we may still be in a secular (long-term) bear market, with an occasional cyclical (short-term) bull market mixed in. We subscribe to the idea that less volatility no longer means lower returns. In this type of market, less volatility may lead to higher returns.
 
These remain volatile times, and we will continue watching the situation closely here at Bernard R. Wolfe & Associates in order to respond quickly to any changes in the outlook. As always, we appreciate the trust you have placed in our firm. Our entire team is here to help you work towards your wealth management goals. If you have any questions, please do not hesitate to get in touch with us.
 
 
1-     Bureau of Economic Analysis, US Department of Commerce website & Wall Street Journal “Savings Continue to Be High” March 27, 2009
 

Bernie's Commentary

October 20, 2009

We received a lot of feedback on our last eNewsletter, which mentioned the topic of Roth-IRA conversions and the rule changes beginning in 2010. This subject presents an opportunity for your financial professionals to coordinate, work together, and help you make an appropriate decision.

In fact, a conversion of certain retirement assets may represent an excellent opportunity for many of you. At the same time, a conversion may not be appropriate for other individuals.

Some of the questions you may want to ask yourself in anticipation of an analysis are as follows:

  • Do you have cash set aside outside of retirement plans to pay the tax upon conversion?
  • Do you expect your tax rate to be higher or lower over the next few years?
  • What are, or what will be, your retirement income sources?
  • Do you have major short, intermediate or even long-term expenses to consider?
  • Who will be the eventual beneficiary of the IRA account(s) from the standpoint of estate planning?

Other factors allow us to look at the decision from an investment standpoint. As financial professionals, we analyze how these assets are positioned as well as how they are expected to perform1 in both up and down markets.

Either way, there is certainly a lot to think about. The decision to convert does not have to be all or nothing. A partial conversion may be appropriate for some. We encourage you to call us to discuss this issue in more detail in the coming months leading into 2010.

1. Past performance does not guarantee future results.

 
 

 Bernie's Commentary

Are we and our economy finally out of the woods?
September 14, 2009
 
We are getting this question over and over. For those of you who have known me for a long time, you probably know that I usually have a very optimistic outlook. This time though, I still have some concerns. Before I explain my worries, I am confident that the collapse of the financial markets (that had seemed very possible through February of this year) was indeed averted. In fact, we even see some stabilization. Just yesterday, the Treasury announced that the guarantees they had provided on money market funds will end on schedule next month. The guarantees did not cost the taxpayers a penny, but instead, actually earned the treasury a billion dollars from fees paid by the participating mutual fund companies. This was a very nice return and clearly a step in the right direction.
 
The stock market rally has been very impressive. The S&P has rallied 54.62%, the Dow is up 45.28% and the NASDAQ is up 61.07% since March 9th, 2009.1My concern is that this could be a “head fake.” We feel this rally has more to do with people feeling thankful that the financial world will survive and not necessarily because of great corporate earnings and/or expansion of our gross national product (GNP). In fact our team here at Bernard R. Wolfe & Associates refers to this rally as the “No Armageddon Rally.” For those of you who have not seen the movie, we are simply saying that the financial world is not coming to an end.
 
With that said, a positive economic outcome is anything but a sure thing. For this reason, we have made changes in the allocations of certain portfolios in the event we have a possible “W-shaped” recession.
 
We are concerned that this recovery may be more of a putt-putt recovery than a boom-boom recovery. We think the economy may slow further as the fiscal stimulus fades and the tax cuts that were enacted in 2001 and 2003 are set to expire. Further, consumers have increased their savings rate from .01% in 2008 to nearly 7% so far this year.2 While this may sound like a positive, it is not good for the economy which relies on the consumer for 70-75% of the GNP number.2 Consumers are not spending as they were prior to the recession. In fact, many people have been de-leveraging in an effort to improve their balance sheet. The current pace of spending by the government cannot continue. It is inevitable that at some point policy makers will make the painful decision to eliminate the budget imbalance, putting fiscal policy back on a more sustainable track. Our government’s spending for fiscal 2009 is projected to be 28% of GNP. Only 1944 and 1945 were higher in the last 150 years. 3 What happens to the growth rate of our economy when the government stops pumping in money coupled with the consumer’s lack of spending? We feel the recent changes we have made to our portfolios take these possibilities into account. While there are never any guarantees, we feel very comfortable with our current strategies regardless of what our economy has in store for us. Our objective is always to strive to match our clients’ goals and risk tolerance with the appropriate blended strategies.
 
As always our entire team is here for you and we welcome any comments or questions.
 
Best regards,
Bernie
Bernard R. Wolfe, CFP®
 
 
1 – Google Finance – September 11, 2009
S&P 500 – An unmanaged index of 500 stocks which is considered representative of the US stock market
Dow – The Dow Jones Industrial average is an index of 30 industrial stocks which is considered representative of the US stock market
NASDAQ – The NASDAQ is an index of all stocks traded on the NASDAQ stock exchange
2 – The Washington Post “Opening their Wallets, Emptying their Savings”, Blaine Harden, July 30, 2009
3 – Morningstar Perspectives “Now Comes the Hard Part”, Reed Conner & Birdwell, August 18, 2009

 
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 The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by NFP Securities, Inc. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It 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. It is not guaranteed by NFP Securities, Inc. for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results. Asset allocation does not guarantee against loss of principal.
 
NFP Securities, Inc., does not provide legal or tax advice and is not a certified public accounting firm. Certain registered representatives of NFP Securities, Inc., may be certified public accountants and in their individual capacity provide accounting and tax services for which NFP Securities, Inc., is not responsible.
 
Securities and Investment Advisory Services offered through NFP Securities, Inc., a Registered Broker/Dealer.  Member FINRA/SIPC and Federally Registered Investment Advisor. 
Bernard R. Wolfe & Associates is an affiliate of NFP Securities Inc. and subsidiary of National Financial Partners Corp., the parent company of NFP Securities, Inc.