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 IHA Monthly   
April, 2012  
In This Issue
Market Commentary
March 2012 Asset Class Returns
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History Speaks
If It Grows, Tax It 
As the tax season finishes up you might be thinking that the government couldn't possibly find anything else to tax. You would be wrong. In the past, governments have taxed urine, windows, soap and even the powder British nobility used to put on their wigs. Among the more creative tax creators was Peter the Great, czar of Russia from 1682-1725. Peter greatly expanded both the territory and military power of Russia during his reign. Of course those things cost money so Peter raised taxes on a range of goods, including nuts, hats, horses, candles, boots and even beehives. Peter eventually implemented a 'soul' tax that was levied upon most males in the country. "Old Believers", those who had not relented to the modernization of the Russian Church, had to pay double. Apparently some souls are more expensive than others. Peter was not
Rasputin beard
That will cost you 
against the use of taxation to engineer social change either. But unlike today's politicians who utilize 'sin' taxes to discourage behaviors such as smoking and drinking, Peter instituted a beard tax. Hoping to promote the habits of the less hirsute Western Europeans among the Russian people, Peter charged men 100 rubles for the privilege of wearing a beard. They also had to wear a medallion around heir neck stating "The beard is a superfluous burden".   
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.

 

International stock markets, which had been marching fairly much in lockstep since last October, have begun showing some signs of divergence over the last six weeks. U.S. stocks remain relatively strong as most economic indicators are still trending moderately positive. Europe seems to have digested the free lunch of Long Term Refinancing Operations (LTRO) and is expressing renewed doubts about the sustainability of debt reduction in its periphery countries. Finally, emerging markets still seem to exhibit more sensitivity to unwelcome economic data from the developed world than the U.S. or other developed nations do and have gotten unwelcome news out of China over the last month. 

The S&P 500 had its best Q1 since 1998, primarily driven by improved labor statistics over the last six months.  An unwelcome companion to this move was a spike in interest rates in mid-March as the yield on the ten year treasury went from under 2% to over 2.4% within a weeks worth of trading days. Although rates have dropped back down to 2% recently, that move  put the first serious dent in the stock markets four month rally. It is reminiscent of a similar spike in rates toward the end of November that preceded a 9% drop in the S&P 500. To us this is emblematic of the difficult task of recovering from a financial crisis. Let us illustrate with a few graphs. This is a chart of the Federal Reserve assets since the beginning of 2008. What it roughly means is that the Fed has put about $2 trillion dollars into the economy.  

FedAssets

Of course the Fed accomplishes this by buying financial assets from banks. Banks can then use that cash to issue new loans or, if they are more cautious, as excess reserves. This is a graph of excess bank reserves since 2008. It shows banks have turned around and put nearly $1.6 trillion right back into their accounts at the Federal Reserve.

ExcessReserves

 There is an inflationary danger here in that those excess reserves can quickly go into the real economy if banks start lending. The following graph show the total outstanding loans of commercial banks.

Loans   

Commercial lending is at its highest level since 2009 and is higher than it was before the start of the recession. If bond investors feel the recovery is strong enough to encourage more lending they are going to drive yields higher on inflation fears. Of course, higher yields are generally a brake on economic growth particularly in highly leveraged areas such as housing.

In Europe, the respite brought on by the ECB's LTRO program seems to have lust its luster in March. In particular, Spain is back in the forefront as yields on 10 year government bonds have moved back above 6%.

Spain
via www.bloomberg.com 

 

  Europe will one day have to face up to its primary problem; the uncompetitiveness of many of the periphery nations especially relative to Germany. Some of the problems are cultural and structural but there are many areas, particularly regarding labor laws and work regulation that simply require the Euro zone nation to decide to change. The OECD indicators of employment protection "measure the procedures and costs involved in dismissing individuals or groups of workers and the procedures involved in hiring workers on fixed-term or temporary work agency contracts". It is probably as good a measure of labor competitiveness as any and a look shows the higher levels of labor rigidity of the Euro zone countries compared to their global counterparts.

JobProtectionindex
OECD Indicators of Employment Protection (www.oecd.org
 On the regulatory front you don't have to look any further than fracking, which is single-handedly changing the energy (and jobs) picture here in the United States. Europe is even more reliant on natural gas then the U.S. and currently pays over five times times the price we pay. However, this article in the Economist details the slow move forward for shale gas in Europe, despite higher estimated reserves than the U.S.

 

Finally, it has been another tough month for emerging market stocks. After leading the way up from the bottom in 2009, most have been treading water for the last two years. The biggest player, China, is down nearly 30% in that period and just announced Q1 would show nearly the slowest quarterly growth in three years. More significant has been the political uncertainty surrounding the sacking of party official Bo Xailai and the arrest of his wife in the James Bond style poisoning of her British confidante. Anytime you get rumors of a political coup in a major economic and military power it is unsettling. But especially so in an economy like China that still exhibits a lot of central control over the economy particularly in the allocation of credit and currency policies.   

 

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Asset Class Returns

Through March 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.    

AssetReturns.2012.03 

The U.S. stock market remained strong through March but international markets, particularly emerging countries, were down for the month. Primary driver behind that trend was China, where Q1 GDP slowed to a near three year low and political unrest surrounding the forced resignation of Bi Xailai, Communist Party leader of Chongqing, spooked markets. Bonds were down across the board as the declining probability of the Fed introducing QE3 caused the yield on the 10 year treasury note to jump briefly above 2.4% in mid-March. 

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Financial Planning Highlight
 
Want to be a Millionaire?

  

Although inflation has taken a big chunk out of the purchasing power of a million dollars, the term still carries a certain fascination. Just ask Regis Philbin!

  

So if you haven't made that first million yet (or you have lost it already) here is a guide on how you can get (back) there. For ages 25, 35, 45 and 55 we give you an amount you have to save annually to get to $1,000,000 by the time you reach 67. Obviously, your investments returns play a huge factor so, based on historical returns, we'll give you what you need to save if you happen to experience a low return period, median return period or a high return period. We'll also let you know at what age you should be halfway to the mark.

Start at Age 25

  

 

Save This Much
Annually

Age When You Should
Be Half Way There

Low Return
(4.5%)

$ 7,639

54

Median Return
(7.0%)

$ 3,772

57

High Return
(10.0%)

$  1,535

59


Start at Age 35  

 

             Save This Much 

Annually

Age When You Should
Be Half Way There

Low Return
(4.5%)

$ 13,153

56

Median Return
(7.0%)

$  7,858

58

High Return
(10.0%)

$   4,090

60

 

Start at Age 45  

  

 

             Save This Much  

Annually

  

          Age When You Should  

Be Half Way There

  

Low Return
(4.5%)

$ 24,577

58

Median Return
(7.0%)

$ 17,490

59

High Return
(10.0%)

$  11,429

60

  

Start at Age 55    

 

               Save This Much  

Annually

 

Age When You Should
Be Half Way There

Low Return
(4.5%)

$ 55,766

61

Median Return
(7.0%)

$ 46,403

61

High Return
(10.0%)

$ 37,071

62


 

The return you experience make a big difference, especially the younger you start saving. But it also the factor you have the least control over so there is not much point worrying over it. The factor you do control is when you start saving. Those who wait until 55 have to save 7-25 times more than those who started at 25.

  

If you would like to play around with your own numbers drop us an email and we'll send you a copy of the spreadsheet used to make these calculations.

 

  

Thank-you for reading,

  

John O'Meara, CFP, MS
and
Michael Keating, CFP
  
  

  

As always, we welcome your comments on style and content.

 

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