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 IHA Monthly   
February, 2012  
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Market Commentary
Asset Class Returns
Lower Your Credit Card Rate
IHA in the WSJ
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History Speaks
Best Year Since ... 1987? 
The S&P 500 kicked off its year with the best start since 1987. Of course, that year is better remembered for its crash in October. Since this year will be the 25th anniversary of that date, we thought we would start the retrospective early. The stock market had been on an incredible run since August of 1982 when the Dow Jones Industrial Average hit a low of 777. Year-end 1986 saw it reach an incredible 1895.95 points. The new year began strongly with a milestone on January 8th: a close above 2000 for the first time ever. That was just the opening act as stocks rallied another 36% in eight months, closing at 2722.42 on August 25th. Dow Jones - 1987That was to be a high point for some time as the market declined throughout Autumn, culminating with a 22% drop on October 19th, Black Monday. The market remained volatile for the rest of the year but never breached the lows of October and closed at 1938.83 points, up 2.2% for the year. While program trading takes popular blame for the crash we think it contributed more to the rapidity of the decline than being the root cause of the decline. We expect those causes were the overvaluation of a market that had risen 250% in five years and higher interest rates, up 3 percentage points in 1987 alone. Neither of those factors align with this year's early gains so, if possible, we will take the January but 1987 can keep the October.

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.



One of the themes we have focused on over the last three years is the deleveraging of the developed economies. But what does deleveraging mean and why does it matter in terms of economic growth?

The first question to answer is what does it mean to be leveraged? And why are we at a stage where that has to change? Simply speaking, leverage refers to the amount of debt you have relative to your ability to pay for that debt. To show the growth of leverage for the U.S. consumer, the chart below shows the ratio of household debt to household income over the 1980-2010 period in real dollars.

Household Debt/Income
Source: U.S. Census and St. Louis Federal Reserve Economic Data

Interest rates declined over that period so the cost of servicing debt got cheaper but it still shows a significant rise in overall debt levels.There is nothing inherently wrong with debt - if it is put into a productive investment. A real estate investment can be highly leveraged. But if the cash flows are positive and the payments maintained, by the end of the mortgage period the payments usually constitute a much smaller real dollar amount than it had at the outset and the investor owns the equity in the building. The danger is leveraging yourself to a point where you cannot make the payments on the debt or where a small decline in the value of your assets wipes out a large portion of your equity. The productivity of household debt can, in part, be measured by the growth in income produced by that debt. the chart below shows the amount of additional household income "bought" by each dollar of debt in from 1980-200 and then 2000-2010.

HI.HD Growth
Source: U.S. Census and St. Louis Federal Reserve Economic Data

Measuring the growth of household net worth  or GDP growth per dollar of household debt would produce similar results. What this shows is that American households were getting less in return for raising their overall leverage. With the death of easy credit over the last few years, American households have started reducing their leverage, sometimes by defaulting on the debt but also by reduced spending.

That reduced spending has been particularly noticeable in new housing starts and auto sales, not coincidentally two of the more leveraged purchases households make. This chart shows the number of new housing starts as a percentage of existing households since 1980:

Source: U.S. Census Bureau

and new auto purchases as a percentage of households:

Source: U.S. Census and WardsAuto InfoBank

We feel this shows households (and their lenders) have been actively pursuing a deleveraging strategy. There are two real questions going forward. The first is whether these reduced level of sales are a floor. If that is the case, it implies that at the very least, equities are fairly valued at current prices with regard to consumer activity. The second question is about the non-deleveraging entity in this equation, government. Just as too much household borrowing can result in slower economic activity when the point of deleveraging occurs, the same is true of government borrowing. The question becomes the time horizon at which that happens. While the U.S. government has massively increased its debt load over the last three years, there are no indications that its lenders are yet ready to reduce their support. But as the events in Europe have shown, this lack of lender confidence can be a rapid event with little time for participants to react.

We feel that in many ways we have seen the floor as regards to consumer purchases such as housing and autos. Deleveraging will continue but that does not imply that growth has to decline to happen, it just makes rapid growth a less likely outcome. Over the next couple of years though, governments will have to make plans for their own deleveraging. The interplay and timing of household and government deleveraging will lead to more bouts of high volatility and generally lower growth rates than historical norms in these deleveraging nations.

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Asset Class Returns

Through December
January 31st, 2012
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.   


Stock markets started the year strongly as the S&P 500 rose over 4% in January. In a marked difference from last year, it trailed international developed and emerging markets which rose 5.3% and 11.3% respectively. REIT's continued to show strength in the low interest rate environment and have outperformed every equity class over the last year. Most bond classes returned around 2% for the the month although instrument Treasuries trailed that mark, particularly the longer duration instruments.  

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Financial Planning Highlight

5 Steps to Lowering the Interest Rate on Your Credit Card

While the best course of action is not to accumulate credit card debt, even the most diligent can get behind at periods. If you do have a balance, these moves can help ensure that you are paying the lowest possible rate.


  1. Find out what rate you are paying now. Seems obvious but many people don't know what rate they currently pay. They might have gotten the card because they like the rewards program or at an introductory rate that has since elapsed. Other times your rate can go up if you have a negative mark on your credit report even if you always remain current on your credit card. Finally, your credit card company can just decide to raise rates (usually to 29.9% it seems). So, check the front page of your credit card statement and look for the Annual Percentage Rate (APR).
  2. Compare your rate to the averages. Go online and look for comparison sites that will tell you what the national averages rates are for credit cards. We like for  anything interest rate related but there are plenty of sites that focus more directly on credit cards (including and ).
  3. Figure out what rate you should be paying. Your interest rate should basically reflect your credit score. Using this, and the information above, you should have a general idea of what rate you could get on the open market.
  4. Find out what rates your card companies are offering new customers. Go online to find out what rate your credit card company would offer you if you were a new customer. Since they are offering this to new clients they should certainly be willing to offer something similar to the existing ones. 
  5. Ask. Call up your credit card company and use the information you have gathered to negotiate a lower rate. Usually you will have to go a lot further then the first person you get on the line. Do not accept "I cannot help" as a response. You want to speak to someone with the authority to lower your rate or affirmatively tell you the card company will not lower your rate. Their support staff is trained to say that they cannot help and hope that you don't escalate the matter. Do not accept that.


If you take these steps most card companies will lower your rate to what you deserve to get. On a longer time scale the best steps you can take to lower your interest rate charges in general is to improve your credit score. So if you find that you are paying a rate that is in line with your score, then your best course of action is to improve your overall credit rating. For some tips on how to do that please see the Financial Planning Highlight of our May, 2011 newsletter.


Thank-you for reading,
John O'Meara, CFP, MS
Michael Keating, CFP
As always, we welcome your comments on style and content.


IHA in The WSJ
InnerHarbor Advisor's partner Michael Keating was featured in the Wall Street Journal's Donor of the Day column, about Michael's charity Core4.
Mike was also quoted in LearnVest, a leading women's online financial planning site, on money lessons to teach children.


Mike and John InnerHarbor Advisors 

Contact Info:
InnerHarbor Advisors, LLC
212-949-0494 and