Earnings & GDP Revisions

Earnings season is always a tenuous time, made more so this quarter because a host of important economic data comes out today and government statisticians will make benchmark GDP revisions. Weeks with lots of data are always interesting; but this one has the potential to be more wild than most. Because of the revisions data will change, in some cases all the way back to 1929. The biggest change is treating R&D spending as a form of investment, just like buying equipment. The theory is that it expands the stock of knowledge, which is then used to discover or develop new products. A similar change is being made for art that lasts more than a year - like movies, books, or hit TV shows. The net effect of these revisions will be to boost the level of GDP by about 3%. So with the top-line level of real GDP revised up, get ready because some portion of those who don’t like the president will claim this is part of a conspiracy to make the economy look better than it actually is. Whether or not you are a fan of many recent policy actions, I suggest you tune out the conspiracy-mongers. The changes have been considered for many years and just as easily could have been made under a republican President…except then it would be different people claiming conspiracy. Generally strong corporate earnings have aided the broader US markets. According to Bloomberg data, of the 305 companies in the S&P 500 that had posted quarterly results through Tuesday, 72% had exceeded analysts’ estimates for profit and 55% have topped their respective sales projections. Certainly the month was not without the typical earnings-related setbacks, evidenced by the hit to many of the Agribusiness names yesterday (Tuesday). Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence. This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.

77% The earnings premium of a US college graduate compared to a High School grad

A century ago multiple children were a godsend; today large families would be ruinous for most. Until the 19th century big families were not in vogue they were necessary. Children were needed to provide income and security for their parents often as non-compensated labor on the family farm. That dynamic continued into the renaissance of industrialization, as families moved into the cities and kids were employed at a very low wage, in the factories. Since then, children have become less “valuable”. Decades of Federal and state mandated education increased the cost of raising children while child labor laws reduced their income potential. Today many offspring attend pricey pre-schools, followed by private schools as expensive as many universities and then attend college, often staying into their mid-twenties – without contributing a dime of income to the family’s bottom line. College Counts, Alabama’s 529 Plan, is an attractive option for AL residents interested in funding their children’s, or grand children’s, education. Assets are not gifted – they are controlled by the donor. On top of tax deferral on the growth of the assets, Alabama is providing a $5,000 state income tax deduction per 529 account established with College Counts - with a maximum deduction of $10,000 for joint filers for the year in which assets are deposited. Additionally, AL residents do not incur state income taxes on withdrawals, regardless of where the child attends school. For more information shoot me an e-mail. Facts & web sites: • The four-year grad rate for state schools is 31.3% vs. 52.5% at private schools. • Net pricing info for all four-year schools may be found at www.collegeabacus.com • Assistance interpreting college aid letters may also be found at www.collegeabacus.com • To view overall grad rates www.collegecompletionchronicle.com Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence. This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.

US Energy Independence!

I first learned that the US has the potential to achieve energy independence several months ago in a discussion I had with analyst’s working at Reaves Asset Management. Subsequently, U.S. energy independence emerged as a topic in the presidential election – with both Romney and Obama embracing the concept. If indeed this is realized, this will undoubtedly have a large impact on the global economy over the coming decades. Recently, Raymond James published an analysis predicting that domestic American oil production would rise from 5.6 million barrels a day to 9.1 million by 2015. This means that US production, as a percentage of total US consumption, will jump from approximately 30% to around 50% of our 19.2 million barrel/day habit. This has huge implications. The value of 3.5 million barrels/day works out to $115 billion a year at current prices (3.5 million X 365 X $90). This drop in imports will lower America's trade deficit by 20 – 25% over the next three years. Further, these 3.5 million barrels have the potential to offset a lot of the world's oil demand growth over the next three years. I will say it again – this is a hugely positive development for the US. Concerns about war with Iran, inflamed by elections in both countries, have taken the price of a barrel up from $75 in the fall; the general consensus is that the “fear premium” has added $30-$40 to the price of crude. The potential for weaker economic conditions in the US and abroad can reduce demand. A massive joint venture (2.8 megawatt) solar plant, planned for the CA desert, is forecast to generate enough electricity for 2 million homes – enough to cover about 15% of the total demand in California. (Solar Trust of America is a joint venture between two European companies and is projected to qualify for $900 million in cash grants and loan guarantees from the Department of Energy.) There is an additional solar facility coming on line in New Mexico – the Tres Amigas. As demand declines, supply increases and the “fear premium” subsides – expect to see even lower oil prices in the US. Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence. This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.

The Debates Influence on Polls

In an attempt to predict (or influence) the outcome of the presidential election Gallup, CNN, Rasmussen and others are polling the public and putting forth their findings. I believe, there are far more accurate polls than these. Every day in the market investors vote with their money. Those “polled” are required to put their money where their mouth is, and being wrong costs them a bundle of money. One example of the market “speaking” is the movement in the U.S. dollar. When president Obama began his surge in the polls in the aftermath of the lackluster Republican National convention in August, the PowerShares DB U.S. Dollar Index ETF (UUP) broke to a multi-month low. When Mitt Romney delivered his unexpected performance at the first debate, the US Dollar index experienced a rally. It then quickly gave back that rally in the wake of Obama's win in the second debate. It is safe to say that the dollar likes Romney and dislikes the President. Other foreign currencies reaffirmed this analysis; the CurrencyShares Euro Trust (FXE) clearly thinks that Obama is great because it spiked to a one-month high after the debate, the Australian dollar also rallied. Which asset likes the incumbent most of all? Gold. In fact, it hit an eight-month high going into the first debate, and then quickly deflated in response to Romney’s strong showing. Since Obama delivered last Tuesday, gold has been up sharply. These are not just random moves. Traders are exercising logic and responding to how the candidates stated policies will impact the markets. For example: Romney has made clear his antipathy towards the monetary policies of Ben Bernanke. He has indicated that he would fire the Chairman of the Federal Reserve on the first day of his administration. No Ben Bernanke – means no quantitative easing. The dollar likes this scenario, gold does not. Watch these two asset classes on Tuesday for an insight into who the market thinks “won” tonight’s debate. Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence. This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.

Beware the Fiscal Cliff

The fiscal cliff; pundits, newspapers and talking heads of every shape and size have been discussing it for months, yet many people are unsure about what it involves. Maybe you’ve heard of it and maybe you haven’t, but the stark reality is that the fiscal cliff is going to have an enormous impact on our economy and personal finances. What is the fiscal cliff? Simply put, it’s a catchy name for a series of tax increases and spending cuts due to go into effect for 2013. It’s a big deal. As your financial advisor, I feel it’s important to make you aware of what’s going on. • the Bush tax cuts are scheduled to expire • the payroll tax holiday is scheduled to expire • dividend and capital gains tax rates are scheduled to increase • new taxes associated with healthcare are scheduled to go into effect • automatic budget decreases are scheduled to go into effect The net effect of these changes will be increased taxes for nearly all tax payers at every income level, and less government spending. As you’ll see, these tax increases are clearly not limited to the “rich”; now defined as those earning more than $250,000. Following, is a synopsis of some of the more important tax changes that are scheduled for next year: Payroll Taxes Increase Full payroll taxes will return in 2013. Medicare Tax Increases The employee’s portion of the tax will increase by .9%; for high income earners (joint filers earning $250,000+) this tax is not capped. Income Taxes Increase Increases apply to nearly every income tax bracket for ordinary income, long-term capital gains and dividends. There is a new 3.8% surtax on the lesser of (1) net investment income, or (2) the excess of modified adjusted income over a threshold amount; $250,000 for couples filing jointly, $125,000 for married couples filing separately, $200,000 for single tax payers, and approximately $12,000 for trusts and estates. Itemized deductions phase-out as income increases. The top dividend rate rises from 15% to 39.6%. The Obamacare surtax raises the top capital gains tax rate to 23.8% (from 15% currently) and top dividend rate to 43.4% (from 15% currently). The Child Care Credit drops to $500 from $1000. The “marriage penalty” returns. The AMT (Alternative Minimum Tax) “patch” expires. The threshold for itemized deductions for unreimbursed medical expenses increases from 7.5% to 10%. Estate & Gift Taxes Increase The estate tax is scheduled to revert to an exemption of $1 million, per person, with a top marginal rate of 55% (an additional surtax applies to larger estates); for 2012 this exemption was $5.12 million, with a top rate of 35%. There are several strategies to employ in 2012 which may mitigate the impact of the scheduled tax increases. I have summarized them below: • Shift taxable assets to tax-deferred investments • Accelerate income • Complete large taxable financial transactions • Accelerate tax deductions • Establish and fund a retirement account • Maximize retirement plan contributions • Consider converting retirement plan assets to a Roth IRA • Review estate planning docs and strategies • Consider charitable gifts • Gift appreciated assets • Make lifetime gifts • Consider wealth transfer strategies • Explore life insurance trusts to pay estate taxes It is possible that Congress could vote, before the end of the year, to eliminate or reduce some of these increases. Either way, it is important that you are prepared. I have developed relationships with proven specialists during the three decades that I have been advising clients, so that I am better able to assist you. I also work closely with my client’s CPAs and attorneys, or can draw from my panel of experts. Here’s the silver lining: My team and I are constantly monitoring both the economy and the markets to make sure we stay ahead of whatever comes our way. As long as we feel staying in the market is in our clients' best interest, that’s what we’ll recommend. But if the moment ever comes when we feel it’s time to put their money into cash, then that’s what we’ll do. So that’s the scoop. It’s an important situation to keep an eye on. Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested.

Oh no, it’s September Again!

As easy as it might be to fall into the "Oh no, it's September, here we go again" trap, it is imperative that we try to emotionally remove ourselves from the media’s reporting for a moment and conduct an objective review of the market indicators and stocks or funds you hold in your portfolio. Then, we can answer the question, "Should I hold or sell?" If there are holdings which are in a negative trend with weak attributes, by all means we should take defensive action and exit the position. But just because it "feels bad out there" and the “talking heads are reporting…” we must resist the urge to make rash and unsupported decisions. For this reason it is important to focus on what the market indicators are suggesting- The major US equity indices are currently in positive trends (as are a majority of stocks) and continue to suggest an offensive posture. And, US Equities continue to rank number one within the six major asset classes. Should something change to suggest increased risk in the market or a more defensive posture we, too, will change. All in all, history would suggest the probability of September being a down month for the market is only slightly better than the flip of a coin. Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested.

US Manufacturing Renaissance

US manufacturing costs have become much more competitive over the past decade. Lower unit labor costs are driven in part by above-average productivity, globally competitive wages and greater use of technology. US employment gains remain sluggish however, due to outsourcing of lower-cost tasks and labor intensive jobs. Despite US natural gas prices having risen from a low of $2/million BTUs to closer to $3/million BTUs recently, natural gas remains inexpensive and abundant in the US, companies in other parts of the world pay significantly more. A declining dollar has also contributed to making US products more competitive globally. Despite the renaissance of US manufacturing, investors have continued pouring money into bonds versus equities. The ten-year US Treasury bond, currently yielding around 1.5%, generates a negative rate of return after inflation is factored in. This perception of safety creates a false sense of security and results in a loss of purchasing power. From a broad portfolio perspective, our focus is on US equities as they continue to rank as the strongest of the six “big picture” asset classes. (The six asset classes, in descending order of strength, are: US equities, bonds, currencies, international equities, cash and commodities.) When we drill down into US equities, we find that the next level of relative strength is that of Mid-Cap; although Small Cap also deserves some attention. Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence. This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.