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 IHA Monthly   
June 2011 
In This Issue
Market Commentary
May 2011 Asset Class Returns
Should you Refinance
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History Speaks

Going  for Broke

It seems certain by now that Greece will have to default or be bailed out by the ECB. Europe has a rich history dealing with sovereign failures including that of Argentina in 1890. The years 1886-1890 had been a boom time in Great Britain's financial markets, with investors eager to put money into risky ventures, including overseas markets. Argentina, which was experiencing a bubble in a real estate and railroad development, was the recipient of a fair share of these monies. Despite land prices tripling and total indebtedness of the Argentinean people and government exploding, British banks continued to direct money there until a political revolution resulted in the ouster of the sitting president in 1890.  The resulting flight of capital from Argentinean paper threatened the survival of a few British banks, noticeably Baring Brothers & Co - the "greatest banking house of the entire world".  The Bank of England had to put together a consortium (prominently including the Lord Rothschild) in order to stop a run on Barings and stem the financial panic from spreading in London. Argentina suffered greatly with GDP shrinking 11% between 1890 and 1891 but the reformed Barings Bank managed to stay in business until 1995 when rogue trader Nick Leeson's losses in the derivatives market put the firm in bankruptcy. 

ArgentineBond

 
Market Commentary

InnerHarbor Advisors, LLC is a Manhattan based financial planning firm catering to market professionals. If you would like to speak with a financial planning expert - or if you are currently working with someone and would like a fresh perspective, please contact John O'Meara or Michael Keating at 212.949.0494 ...or simply 'reply' to this email.

 

Stocks have been on a steady downtrend for the last six weeks with the Dow Jones Industrial Average recently closing below 12,000, down over 800 points since the first of May. The losses have been driven by fears of continued U.S. economic weakness, indications of Greek default and signs of slowdown among emerging economies.

U.S. economic indicators have turned flat to negative over the last quarter.

From GDP:

US GDP Growth

To manufacturing:

US PMI

To employment:

US Unemployment

Obama administration officials, members of the Federal Reserve and many private sector economists have been relatively sanguine about these numbers, calling the current period a "little bump" in the recovery. In many ways, market action is backing this viewpoint, despite the fact that the S&P 500 has declined for six straight weeks, it is only 7.1% off its April peak and still above the low it made after a quick sell-off in mid March. Investors seem to be betting that some of the impediments hindering the markets in recent weeks (the supply chain shock out of Japan, the jump in oil prices) are temporary and/or transitory in nature and global economic growth will rebound in the second half of the year. We think another factor is that many market participants got burned last year when similar signs of a slowdown resulted in a 16% sell-off in the market that was quickly reversed when word of the Federal Reserve's QEII program hit the market. The following chart compares the pace of decline in 2010 and 2011:

Declines

If the market is expecting a third round of quantitative easing we feel they may be waiting a while because all comments coming out of the Fed suggests a real reluctance to providing more stimulus.

 

More broadly, we feel that these gyrations in the market are still the echoes from the financial crisis that began in 2007. While we have come a long ways from the lows of March 2009, the banking industry and the private sector are still trying to recover from the debt binge they indulged in from 2002-2006. Governments stepped in massively to prop up demand at the time of the crisis but the cost of that is starting to come due as stimulus has to be withdrawn and the public sector debt load needs to be addressed. As a result, financial markets potentially face an extended period of relatively high volatility in returns and vulnerability to external shocks similar to what we have seen over the last year.

Asset Class Returns


Through May 31st, 2011
-
Monthly and 52 week returns for major asset classes. Performance information is for total return assuming reinvestment of interest and dividends. It excludes management fees, transaction costs and expenses.  

 

 AssetReturns

A down month for risk assets as slowing global economic indicators and international pressures arising from European fiscal problems and the Japanese earthquake-linked supply chain problems has led to a selloff in stocks. The largest drops were in international markets but U.S. stock indices fell between 1%-2% for the month. While bonds fared better, there was a similar theme as  higher risk junk bonds barely ticked up for the month but U.S. treasuries were up over 2.5%. Commodities sold off hard, losing nearly 7% in May. 

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Financial Planning Highlight

When Should You Refinance a Mortgage?
  
We review the important aspects to help make this decision.
 
Rates again near historic lows.
After shooting up above 5% at the end of 2010, mortgage rates have been quietly declining all year long and are now back under 4.5%. This is a second chance at historically low rates for those that thought they had missed their opportunity last year. 
Mortgage Rates
 

The first step is to clarify your goal in refinancing. It can be as simple as locking in a lower rate, reducing monthly payments, trading out of a more risky loan (ie. short term ARM, interest-only), or consolidating other, less tax advantaged debts accumulated. All of those examples are legitimate reasons to consider a refinancing but if you aren't clear of your own purposes it will be difficult to judge the merits of a refinancing offer.

Once you have established the desired purpose of the refinancing it is time to look at the actual numbers. There are two factors that come into play in these calculations, the fees involved in closing the refinancing and the new mortgage rate and term. Closing costs are significant in New York, the the highest in the country in fact. You will have access to a Good Faith Estimate (GFE) from your mortgage lender/broker which will illustrate these costs. The rules surrounding GFE have been tightened in the wake of the housing crisis and should be more accurate than they have been in the past. Once you have estimated these closing costs, calculate how much lower (if any) your new monthly mortgage payment will be. Divide the closing costs by the monthly saving. This number will give you the amount of monthly payments required to cover the refinancing cost. Also important - calculate the total amount of interest you will pay over the term of the new loan in comparison to your existing mortgage (multiply the monthly payment by the months of payments remaining in the loan and subtracting the current principal). The following links will help you make these calculations.

  

Once armed with this information, you have to measure it against your goals of the refinancing. If you are looking to reduce your rate then your monthly payments and overall interest payments should be lower. If you need to reduce your expenses then obviously the monthly payment must be lower but the total interest you pay over the life of the loan may be higher. If you are getting out of a variable loan, the new terms should fit within your budget for housing and living expenses, even if they increase the monthly payment you make right now. If the purpose is debt consolidation then you want to make sure you extract enough to eliminate higher cost debt but minimize the amount of additional debt you are taking on in the refinance. As you can see, what might be a good deal for one individual can be anything but for another. This is why we stress the importance of establishing a goal for the refinancing.

  

A couple of notes on your refinancing search.  Often the best place to start is with the bank that holds your existing mortgage as they should be able to offer the lowest closing costs. But also talk to other mortgage lenders and brokers to get a feel of what is available to you. This is particularly so if there might be some issues with your refinancing (high loan-to-value, low credit score). A mortgage broker may know which institutions offer the best rates to people with specific situations whereas your local bank may be a little more rigid.

 

As always we welcome your comments or suggestions. Stop in, call 212.949.0494,  or simply 'reply' to this email.  

 

Thank-you for reading,

John O'Meara, CFP
and
Michael Keating, CFP
  
  

 

 

Mike and John InnerHarbor Advisors 


Contact Info:
InnerHarbor Advisors, LLC
212-949-0494
j.omeara@inneradv.com and m.keating@inneradv.com

Website:
www.inneradv.com