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Journey with DWM to
What's Next |
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Some economists say "up" and some say "down". The truth is, no one knows the future. But affluent, enlightened investors recognize that DWM strategies perform in up markets and protect in down markets. Regardless of what the future holds, with DWM, savvy investors are ready for what's next. | |
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Budget Debate: Let's Put it in Perspective | |
Michael Ramirez of Investor's Business Daily posted this great illustration of the Budget Pie last week. It really helps put in perspective the debated cuts of $33 billion or even $61 billion for the current year's budget. And, more importantly, it really demonstrates the large portion of the pie tin (43%) where spending exists and revenue doesn't.
Last week Washington also laid out the battle-lines for next year's budget.
On Friday, the House approved a sweeping blueprint aimed at cutting the deficit by hitting at the heart of entitlement programs, calling for dramatically revamping Medicare and Medicaid to pare trillions of dollars over the next decade. The GOP's non-binding framework, which would trim $4.4 trillion over 10 years, starting October 1, 2011, won by 235-193 with all but four Republicans voting for the measure and all Democrats opposing it. The measure probably won't even get to a vote in the Democrat-controlled Senate. President Obama would likely veto it if it did pass.
President Obama laid out his own budget proposal earlier last week, proposing $4 trillion in deficit reductions over 12 years. He would cut the federal deficit by eliminating health care fraud, raising taxes on the wealthy and paring defense spending. The upcoming debates and resolution are critically important to all of us. Between Congress and the President, we've got almost everything "on the table."
William H. Gross, founder of PIMCO, managers of over $1.2 trillion dollars, primarily in bonds, presented his thoughts on the budget deficit in his April investment outlook. He's concerned, as many of us are, that Washington will talk about change but not get it done. The rating firm, S & P, reiterated that fear yesterday, lowering the outlook on U.S. debt to "negative."
Mr. Gross's column compared Congress to Pepe Le Pew. Yes, that cartoon character who seeks to woo his female companions with a French accent and "promises of a skunk bungalow and bedrooms full of little Pepes in future years." Mr. Gross says Congress has acted similarly-" dressing up in full makeup every two or six years, pretending to change, vowing to correct what hasn't been corrected, promising discipline and striving to balance the budget." Yet, it never happens.
Mr. Gross, like most of us, is quite concerned about the budget deficits and up til now, Washington's inability to recognize that only 25% of the budget is non-defense discretionary. Entitlements account for 44%, Defense for 24% and interest for 7%. Without attacking Medicare, Medicaid and Social Security, we'll have $1 trillion or more annual deficits "as far as the nose can sniff."
The bigger issue Medis the overall debt burden. Unfunded liabilities for Medicare, Medicare and Social Security are $66 trillion, which is the discounted present value of future commitments. When we add $9 trillion on federal debt to that amount, we have $75 trillion in total debt. This year, the US government will pay about $250 billion in interest on its debt. Even at current rates, which may not continue to prevail, interest on $75 trillion would be $2.6 trillion of annual interest. So, as Mr. Gross, says "Pepe, you've got a stinker of a problem."
Mr. Gross continues: "I stand before you as a representative of a $1.2 trillion money manager that has been selling Treasuries because they have little value within the context of a $75 trillion total debt burden. Unless entitlements are substantially reformed, I am confident this country will default on its debt; not in conventional ways, but by picking the pockets of savers via a combination of less observable, yet historically verifiable practices- inflation, currency devaluation and low to negative real interest rates."
Mr. Gross concludes: "So come on you stinkers; enough of Pepe Le Pew romance and promises. Entitlement spending is where the money is and you need to reform it." Let's hope Washington does not imitate Pepe but instead, through the ongoing debates and ultimate passage of meaningful laws brings real reform to our major budget deficit and debt problems.
For more information:
http://www.pimco.com/EN/insights/pages/skunked.aspx
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Detterbeck Wealth Management
www.dwmgmt.com
220 N. Smith Street
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Palatine, IL 60067
847.359.6262
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Charleston, SC 29401
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E-Commerce: Amazon Battling in Illinois and South Carolina | |
 Amazon's battle with state governments over sales taxes is escalating. Illinois and South Carolina are two of the major battlegrounds.
Last month, Illinois Governor Pat Quinn added to his reputation as America's most taxing politician by signing a law applying the state's 6.25% sales tax to Internet purchases made in Illinois. Within hours, Amazon announced it would discontinue using any of its 9,000 small business affiliates to avoid having to collect the tax. Earlier this year, Amazon cut its state ties in Texas, Rhode Island, North Carolina and Hawaii. Amazon's Illinois affiliates generated $611 million in advertising revenue in 2009 and Illinois tax revenue of $18 million. Without Amazon, it is estimated that the state will lose 25% to 30% of the tax revenue because the affiliates will lose business, cut jobs or move out of state.
In South Carolina, the "fray" hit the fan last week. A year ago, Amazon announced it would build a distribution facility in Lexington County, South Carolina. The deal called for the SC Department of Commerce to make its best efforts to revive a law that expired last summer that would prevent the state's sales tax from being applied to items South Carolina residents buy from Amazon. The $100 million warehouse would employ about 1,200 people.
On April 6th, SC Governor Nikki Haley reiterated that she opposes the deal but would leave the fate of Amazon and 1,200 jobs in the hands of legislators. On April 13th, legislation was filed in the SC House and Senate to provide Amazon a five-year exemption from collecting the 6% state sales tax. Amazon's retail competitors who currently collect the tax have been lobbying against the break. So, last Friday, Amazon announced that until the tax break is secured it has suspended hiring for the SC warehouse. If legislation stalls, Amazon is prepared to abandon the project.
Many of us recall that the U.S. Constitution prevents states from taxing "interstate commerce." This constitutional protection has been interpreted to mean that no state can force an out-of-state merchant to collect and pay sales/use tax unless it has "nexus" in the state. In 1992, in Quill Corp. v. North Dakota, the U.S. Supreme Court held that a business had to be physically present in a state before it was required to collect sales tax. Merely shipping into the state wasn't enough.
Amazon's SC warehouse and employees would give it nexus in SC. The Illinois affiliates apparently give it nexus in Illinois. Interestingly, if you read Amazon's website regarding sales tax, it says that shipments to Kansas, Kentucky, New York, North Dakota or Washington are subject to sales tax. Amazon obviously recognizes it has nexus in those few states and is neither interested nor willing to collect and submit sales taxes in the other 45 states.
Potential elimination of sales tax is a big boon to consumers and their online suppliers. Certainly, online shopping has increased greatly because of its convenience, product selection, availability, lower base cost and taxes and shipping/delivery. Consumers looking for the best possible deal typically are buying online, and saving the 6% sales tax becomes a big part of the decision.
But wait. Are the glory days of e-commerce coming to an end? Just last week, Illinois Senator Dick Durbin announced he will be introducing legislation to force online retailers like Amazon and eBay to collect state sales tax from customers.
The bill, called the Main Street Fairness Act, would put "Internet retailers on a level playing field with brick-and-mortar stores." Of course, even if the bill became a law, it might be considered unconstitutional based on the Quill case. We'll see.
In the meantime, the battle lines over e-commerce have been drawn in both Illinois and South Carolina. Both states want to simultaneously increase tax revenue and jobs. The problem is- these goals seem to be mutually exclusive.
http://vator.tv/news/2011-04-12-glory-days-of-tax-free-e-commerce-at-an-end
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Financial Advisers: New SEC "Plain English" Documents |
The Securities and Exchange Commission (SEC) adopted new disclosure requirements for Registered Investment Advisers last July. We're all for it.
RIAs, including DWM, have been providing disclosure on Form ADV for years. However, the SEC determined that clearer and more meaningful disclosure was needed. Information is required to be in plain English, so that clients and prospects can fully understand the advisor's business and make informed decisions when selecting and retaining advisors. Excellent idea.
DWM is pleased about the amendment and happy to provide this information. Our new disclosure document was completed and submitted to the SEC on March 30, 2011. It is substantially different in form and content and includes additional information from earlier forms. We will be mailing a hard copy of "Parts 2A and 2B of Form ADV" (Firm Brochure and Brochure Supplement) to our clients, prospects and others in the next few weeks.
If you want to get a head-start, you can access the electronic version, which also appears on our website, now at: http://www.dwmgmt.com/DWM-ADV.pdf
It's surprising to us. Many investment advisers have complained about the new SEC requirements. They feel it's just extra paperwork that's a real burden required to be completed in a very busy time of the year. In fact, it is estimated that one-third of the advisers did not meet the March 31, 2011 filing deadline. We view it differently. We welcome this opportunity to inform clients, prospects and others. Furthermore, we think this new SEC rule provides a great forum by which investors can compare advisers.
Here are a few of the key excerpts from our document:
"Detterbeck Wealth Management and our personnel owe a duty of loyalty, fairness and good faith towards our clients, and have an obligation to adhere not only to the specific provisions of the Code of Ethics, but to the general principles that guide the Code."
"As a wealth manager, we not only offer to provide investment management advice, but also offer practical solutions for taxes, retirement, estate planning and asset protection."
"Our Investment Management Advisory Services is a fee-based investment program designed to achieve reasonable long-term returns for a given level of risk."
"The fees for Detterbeck Wealth Management Investment Management Advisory Services range from a minimum of 0.45% to a maximum of 1.75% depending on the asset style chosen, the nature of the advisory account and the size of the portfolio."
"Detterbeck Wealth Management does not charge performance-based fees."
"We may use the following methods of analysis in formulating our investment advice and /or managing the client assets: fundamental, technical, quantitative, qualitative, and other analyses."
"Our firm does not have actual or constructive custody of client accounts."
ADV Part 2A is the "firm brochure" and provides information on our services and advice, fees, types of clients, methods of analysis, investment strategies and risk of loss, disciplinary information (nothing to report), code of ethics and personnel trading, brokerage practices, review of accounts, client referrals, custody, investment discretion, voting client securities proxies, and financial information. Part 2B is the "brochure supplement" which provides information about the particular advisory personnel whom clients will be relying on for investment advice. We've included our credentials and information concerning our CFP® and CFA designations.
We hope our clients, prospects and friends take the time to review this information. We're very proud of it. We're pleased to discuss it. And, we're happy to have you compare our information to that supplied by other investment advisers.
Here's the short summary (and sales pitch): We always put our clients' interests first. We work very diligently to provide excellent long-term value to our clients; to help protect and grow their assets. We work on a fee-only basis. We feel our qualifications, expertise and resources, including those of the custodians we use, are second to none. We're not part of a large bank. We're an independent, boutique wealth management firm providing affluent, enlightened individuals with exceptional investment experiences.
We look forward to your comments and questions.
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Ask DWM: Are TIPS the Inflation Solution? |
Been to the gas pump or grocery store lately? Consumer price-growth is definitely accelerating and, with it, increased concerns about inflation.
Some investors and advisers say the inflation solution is Treasury inflation-protected securities ("TIPS"). TIPS are issued by the U.S. Treasury and are designed to provide protection against inflation. The principal amount of the bond increases with inflation and decreases with deflation, as measured by the Consumer Price Index ("CPI"). When a TIPS matures, investors are paid the adjusted principal or original principal, whichever is greater. Sounds great, doesn't it?
Over the last two years many investors have apparently agreed. They bought $86 billion in TIPS in 2010; up 48% from 2009. And returns have been excellent: 8% per year for TIPS as compared to 1% for Treasuries.
So are TIPS the panacea? The answer: Probably not.
The real issue is whether the U.S. Government is willing to honestly apply an inflation adjustment to protect holders of TIPS from loss of purchasing power now and in the future.
To begin with, adjustments based on CPI may currently understate the real rate of inflation. The Labor Department reported last week that CPI increased 0.5% in March, and gained 2.7% in the last twelve months. Core prices, which exclude food and fuel, increased 0.2% in March and 1.3% in the last twelve months. Inflation feels larger than that, doesn't it?
The key to understanding CPI is to look at its construction. A survey is done monthly on goods and services and consumers to determine spending habits. The goal is to arrive at a basket of goods that is weighted to reflect the spending of the average consumer and then track the cost of that basket of goods over time. In the eyes of the US government, 15% of what we spend is on food and drink, 42% on housing, 17% on transportation, including gasoline, 7% on medical care, 6% on recreation, 6% on education and 7% on various other items. Of course, these are averages. Every US citizen would have their own unique spending percentages.
What is really important currently is the 42% assigned to housing. Housing is not something consumers "buy" regularly, like food or other services. Americans typically establish the "cost" of housing when they purchase their home and for most, this is a fixed cost. In fact, the "cost" of housing according to CPI surveys has declined slightly in the last twelve months. So, even though food costs, transportation, education and medical care are all up substantially, the weighted average, including housing, is up only 2.7%. If we remove housing from the calculation, CPI would have risen about 5% in the last twelve months. As a result, investors in TIPS may be getting short-changed currently when they get their semi-annual CPI adjustment.
The other factor is whether TIPS investors can count on U.S. Government promises in the future.
Social Security and Medicare recipients, who think their benefits are indexed for inflation or otherwise protected, may see some major form of entitlement reform in the near future. Here and abroad, central banks continue to print money. Recent sales of U.S. debt show that the risks are clearly to the upside for inflation. If US debt continues to grow, and rates continue to rise, could TIPS holders be vulnerable to changes in payment terms, so that they, too, shoulder their "fair share?" And, could these concerns, along with general concerns about the US's ability to pay its mounting debt, depress the value of TIPS in the future? It's certainly possible.
Yes, TIPS do provide some protection against inflation. But, like any other investment, they come with risk(s) as well. They should not be used as the sole defense against inflation.
Instead, we would recommend a well-diversified portfolio that includes equities, fixed-income and non-correlated investments. Equity securities represent the ownership of real assets and behave as an inflation hedge in the long-term. Fixed-income securities react negatively to expected and unexpected inflation. However, as we have discussed in other issues, most investor portfolios would benefit by some allocation to fixed income securities that are diversified, with an average duration of five years or less, and actively managed. TIPS could be a small part of this fixed-income allocation. Finally, non-correlated (alternative) strategies include non-liquid alternatives such as real estate or equipment leasing programs and liquid alternatives, which include commodities and tactical portfolios. Collectively, these strategies are designed to produce a hedge against inflation, reduce volatility and produce more absolute-type returns.
Construction of such a portfolio will differ for each investor depending on goals, objectives, personal circumstances and risk profile. And, of course, the portfolio will need to be actively managed.
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