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 IHA Monthly   
November 2011 
In This Issue
Market Commentary
October 2011 Asset Class Returns
Saving for College
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History Speaks
Shays' Rebellion 
Following massive debt expansion in the U.S. over the last two decades, it is perhaps unsurprising to hear calls for debt forgiveness coming from lawmakers pressing for mortgage principal forbearance and Occupy Wall Streeter's demanding relief from their student loans. But none of these calls approach the level of action in 1780's Massachusetts when Shays' Rebellion arose from farmers and small landholders protesting debt collection and foreclosures. Daniel Shays was a farmer in Western Massachusetts who took a break from farming life to fight in the Revolutionary War. He was a veteran of many battles, including Bunker Hill, and left the army in 1780 -unpaid for his service- due to an injury. Upon returning home he found himself in court for non-payment of his debts. Shays was not alone in this predicament and began agitating for action against the lenders and the courts. One of his followers, Plough Jagger, clarified the spirit of the movement as a "time for us to rise up ... and have no more courts, nor sheriffs, nor collectors, nor lawyers". Shays' followers began attacking courthouses, interrupting  foreclosure proceedings and forcing jurists to flee. In September 1786, Shays led a large armed mob to interrupt the Massachusetts courts in Springfield. This led to a mobilization of state militia to challenge the rebels and eventually Shays' forces were defeated and captured following an ill-fated effort to seize weapons from an armory in January 1787. Daniel Shays was pardoned in 1788 after swearing an oath of allegiance and later received a small pension from the U.S. government for his service in the Revolutionary War.
Market Commentary

InnerHarbor Advisors is a Manhattan based financial advisory firm specializing in: Financial Planning - Wealth Management - Insurance 
If you would like a fresh perspective on your finances, please contact John O'Meara or Michael Keating at 212.949.0494 ...or simply 'reply' to this email.


Markets remain highly sensitive to macroeconomic issues and move powerfully with every twist and turn that is the European Debt Drama (now completing its second season)

October saw the halt of a four month losing streak in global stock markets... and Europe remained the driver, with expectations a deal on Greek debt had been reached. 

Providing the spark was news of an initial deal reached by France's President Sarkozy and Germany's Angela Merkel on Greece's debt problems. The deal involved European banks and other holders of Greek debt- including the Greek banking sector and public pension funds- taking a 50% cut in the face value of the debt. Next, the EU would fund a financing vehicle to recapitalize banks and to support the sovereign debt of at-risk European countries. In return Greece would implement significant structural changes, which translates to raising taxes and kicking people off the public payroll. Good feelings didn't last long as Greek Prime Minister Papandreou announced he would bring the deal to his people via referendum- a bid to gain a public mandate. This caused an immediate backlash from Greek and other European leaders and a sell-off in world markets, particularly Italian government bonds. Incidentally, it's far more predictably European to tell citizens what they will get, not ask them if they want it.

The chart below illustrates yields on Italian government bonds, which didn't come in much on the initial Greek announcement but moved toward record highs in late October/early November under threat of referendum. This is notable and extremely dangerous for the Europeans because it appeared investors were abandoning Italy, a country too large to bail out.


The chart below shows how expensive an Italian bailout would be. The size of each bubble indicates relative GDP for Spain, Portugal, Italy and Greece. Italian GDP is larger than the three other countries... combined. 


Italy's accumulated debt load is second only to Greece's but the Italians run a much smaller annual budget deficit. For this reason, Italy has come under intense pressure from its neighbors to decrease their debt, resulting in the resignation of Prime Minister Berlusconi. The installation of technocratic governments in Greece and Italy in the last week stopped the panic in stock markets but has not calmed bond markets as yields in the periphery European countries remain near highs. 

In the U.S. there is less talk of a recession starting in the fourth quarter as the most recent GDP report showed 2.5% annualized growth and economic data has remained steady, albeit at depressed levels. To pick two coincident indicators, here are the charts of initial unemployment claims and retail chain store sales (via Retail Sails) year to date: both show a similar story in that the data seem 'range bound' but certainly not 'recession' bound...





Looking ahead, markets will continue to react to the European sovereign debt situation. Until investors are assured European banks will be able to survive much needed sovereign restructuring and realignment, there will be a risk of financial contagion resembling the crisis in 2008. The upside: Europeans get through this crisis, leaving themselves in better fiscal condition and unleashing demand pent up during a slow recovery in the developed world.


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Asset Class Returns

Through October 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.   


October was one of the best months in the history of the U.S. stock markets as stocks posted returns well in excess of 10%. International developed and emerging markets were also sharply up as investors reacted positively to developments out of Europe indicating a more consolidated response to the financial crisis hitting the continent. The rally extended to all 'risk' assets, including REIT's and junk bonds. Treasuries were down a little on the increase in risk appetite. 

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Financial Planning Highlight

Saving For College 

"Paying for my child's college education" is a priority for many people. Considering the upward spiraling costs associated with higher education, the only feasible way for many people to do this is to start saving years before their child writer their first college entrance essay. This month we will look at a few of the most effective vehicles for college savings.


First we will start with the costs (ugh) of a college education. The average in-state tuition at a public college this year is $8,244. The average private college tuition is $28,500. Neither of those numbers includes room and board. For our selfish reasons (we each have young children eventually requiring higher education) we hope costs stop rising at such a rate. But the fact is college tuition inflation has averaged 8% a year which, if it continues, means college will double in price every nine years. The following link is to a simple-to-use calculator that can help you estimate what tuition might be when your child reaches 18.


NY Times College Cost Calculator


There are a few ways to save for college that have tax benefits beyond simply putting money in a savings or brokerage account.


529 Plan.  A 529 Plan is the best dedicated savings vehicle for college costs. Plans are run by individual states but open to out of state investors and applicable to colleges and universities in any state. For example: A New York resident can invest in Virginia's 529 Plan, using the account to pay tuition in Arizona. Some advantages of a 529 plan:

  • Money grows tax free and if used to pay college costs can be withdrawn tax free.
  • Many states, including New York but not New Jersey, give a state tax deduction for the money put into a 529. In New York a married couple can deduct up to $10,000 in contributions, which can reduce their taxes by $1,000 or more depending on their income and city of residence.  
  • The donor retains control. Most states will allow the money to be withdrawn even if not used for college (although generally with a penalty). Also, the named beneficiary can be changed so that if one child doesn't need all the money in her account it can used for another child. 

Roth IRA. A Roth IRA can resemble a 529 Plan when used for college savings.

  • As a retirement vehicle, investments in a Roth IRA grow tax free and withdrawals are tax free if the owner is over 59 1/2.  
  • Withdrawals for those younger than 59 1/2 are normally subject to a 10% penalty which is waived if those funds are used to pay college costs. Keep in mind, withdrawals from a Roth IRA that exceed your contributions will be subject to income tax.
  • Money in your Roth IRA does not affect your child's eligibility for financial aid.

Traditional IRA.  When a traditional IRA is not deductible it can look very similar to a Roth in terms of college savings. A deductible IRA has some other wrinkles. 

  • Contributions to a traditional IRA can be deductible on your federal income taxes.
  • Investments in a traditional IRA grow tax free. 
  • 10% penalty waived for withdrawals before 59 1/2 if used for college savings.
  • Regardless of the penalty, withdrawals from a deductible IRA are subject to income tax. Withdrawals from a non-deductible IRA are subject to income tax to the extent that they exceed contributions
  • Money in a traditional IRA does not affect your children's eligibility for financial aid.  

So the big question is: How much you should I save? Before we get to that we feel it is important that you prioritize your savings. In short, there are a multitude of ways to pay for college but far fewer options when it comes to funding retirement. So we urge people to fully fund their retirement accounts before they start putting away large amounts of money for their child's college costs. Also remember that if you use an IRA to help pay for college you are dipping into your own retirement funds and this will affect your retirement age and lifestyle. But for those still looking for a number, we direct you to the following calculator which will allow you to play with contributions to 529 plans as well as regular taxable savings accounts to determine how much you will need to save each year.


CNNMoney College Savings Needs Calculator 


Thank-you for reading,

John O'Meara, CFP
Michael Keating, CFP



Mike and John InnerHarbor Advisors 

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212-949-0494 and