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| September 13, 2011 | Issue 55 |
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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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World: Greece Edges Closer to Default | |
Greece Prime Minister George Papandreou has been trying to avoid a default and keep Greece in the euro. The Greek cabinet on Sunday voted to cut one month's wages from all elected officials and impose an annual charge on all property to be levied through electricity bills to ensure collection. It may be too little, too late.
Europe's banks, burdened by concerns about exposure to ailing Greece, took a big hit yesterday. France's financial system was especially hit hard, with stock prices in its three largest banks falling more than 10%. The French government has declared its support for the banks.
Bloomberg reported yesterday that Greece's chances of default in the next five years has soared to 98%. The default probability for Greece is based on a standard pricing model that assumes investors would recover 40% of the bonds' face value if the nation fails to meet its obligations.
Greece has floundered to produce any noticeable economic results after more than a year of bail-out payments from the European central bank. The Greek government now expects the economy to shrink 5.3% this year, worse than the June estimate of 3.8% from the EU and the IMF. The forecast damps hopes that Greece will meet its pledge to lower its budget deficit to 7.5% of GDP in 2011 (it's currently running close to 15% of GDP).
In Germany, patience is wearing thin. Most reports indicate that Germany may be getting ready to give up on Greece. After two years of fighting to contain the region's debt crisis and providing the biggest share of three European bailouts, German Chancellor Angela Merkel is laying the groundwork for what markets say is almost a sure thing: a Greek default. Instead of talking about how much more in bail-out funds Germany should allot to Greece, leaders in Berlin are talking more about restructuring and shoring up German banks. Germany is between the proverbial rock and hard place.
John Mauldin, author and columnist with his Thoughts from the Frontline newsletter, has done a nice job again this week of identifying what might happen in the credit crisis brought on by Greek default. Mr. Mauldin predicts that Greece will not get further bailouts and Greece will in fact default. The problem is that the Greek crisis will then likely be the beginning of a string of crises and not the end. European banks and governments have invested heavily in Greece. While many have written down their investments 20-50%, the likelihood is that there will ultimately be a much larger haircut, perhaps 90%.
There is, according to Mr. Mauldin, very little likelihood of Greece leaving the Euro. The consequences of sovereign default, corporate default, collapse of the banking system and collapse of international would be devastating to the country and its people. Incomes and GDP could be cut in half in the first year. Countries cannot be expelled from the EU, but they may secede.
If Germany left the euro, the costs would also be substantial. If Germany seceded, it would also likely incur corporate default, recapitalization of its banking system, and a collapse of international trade. Germany's export-base manufacturing economy would be hard hit as its currency would likely soar, much like the Swiss Franc. Secession might mean a cost to every German adult and child in the amount of approximately 7,000 euros the first year. In comparison, the cost of bailing out Greece, Ireland and Portugal might cost German citizens "only" 1,000 euros per person in a single hit.
Obviously, there is no free lunch for Greece, Germany or Europe. At this point, it's not a matter of pain or not, but of how much pain and how it is shared. And, breaking up, for weak and strong countries alike, would likely be very expensive not only for Europe by for the world's economy as well.
http://www.bloomberg.com/news/2011-09-12/greece-s-risk-of-default-increases-to-98-as-european-debt-crisis-deepens.html |
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Detterbeck Wealth Management
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Palatine, IL 60067
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Roth Conversions: "Undo" Deadline Approaching |
You've got just about one month to push the bottom and undo your 2010 Roth conversion. Before you push it, let's review what's involved.
October 17, 2011 is the day of reckoning for "do-overs." After that date, investors who made 2010 Roth conversions will be irrevocably locked into those Roth conversions and the tax bill that comes with them. The recent extraordinary market volatility, however, has made the deadline loom ever larger. Depending on the investment strategy employed for the Roth accounts after conversion, the funds may have lost market value since conversion and, without recharacterization, investors would be paying taxes on values that no longer exist.
That are two important issues here- taxes and investment strategy. We'll first tackle the taxes.
For those investors that made Roth conversions that have already lost substantial value, the decision to recharacterize is a no-brainer. But what happens when the account value is just slightly lower, virtually the same, or even slightly higher than the value at the time of conversion? The answer is a little complicated. Particularly, since most investors who converted in 2010 took advantage of the two year tax deferral deal that allows them to split the income between 2011 and 2012 without interest.
Our CPA and tax attorney friends tell us that if investors decide to keep the conversion as is, the benefits are less paperwork, since there will be no amended tax returns, and taxpayers can keep the two year deferral deal if they opted for it on their 2010 return. In addition, investors can keep whatever tax-free growth has already been achieved in the account. On the flipside, investors can recharacterize the conversion, return the Roth funds to their IRA(s), and, after waiting 30 days, could consider reconverting the IRA funds to Roth.
In theory, investors, as long as they follow certain rules and deadlines, could play the conversion-recharacterization-reconversion game forever. Note that if an investor reconverts in 2011, all the conversion income would be included in their 2011 return. And, they would have until October 15, 2012 to once again determine if they wanted to undo it.
Now, let's talk about the investment strategy.
Many newspapers would have you believe that most investors who converted their IRAs to Roth put the Roth money into stocks and therefore the values of those accounts have declined substantially. DWM clients who converted didn't generally invest in stocks; they invested in fixed income and liquid alternative strategies. Here's the logic.
While stocks have, in fact, outperformed other asset classes over the last 80 years, we don't think they generally belong in an IRA or Roth account. First, 80 years of historical performance means little in today's volatile economy. Certainly, some analysts believe this is a great time to buy stocks. Others believe the world has changed and stocks, for at least the next few years, are not the place to be.
Second, though, are the tax considerations. Investors, who own stocks, we believe, should hold them outside their retirement accounts in "taxable" accounts. If there is capital appreciation, the current tax rate is 15%. If there is a loss, taxpayers can use it to offset capital gains. In retirement accounts, there is no tax benefit of investment losses. Furthermore, capital gains in IRAs are ultimately treated as ordinary income when distributed.
Most importantly, the appreciation in Roth accounts is not taxable. Hence, regardless of type of income, be it dividends, capital gains or interest, there is no tax. In addition, many investors who converted to Roth intend for those funds to go to their children and grandchildren one day to stretch the tax-free nature of the Roths for generations to come.
Hence, the investment strategy for Roth accounts should be to protect the asset and grow it. As a result, a diversified portfolio using fixed and liquid alternatives is employing a far superior strategy to an all-stock portfolio for a Roth account.
Certainly, you want to check with your CPA or tax attorney before pushing the "undo" button for a 2010 Roth conversion. And check with us for a proven investment strategy for your retirement funds.
For more information: See Ed Slott's IRA Advisor, September 2011 |
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Ask DWM: What Exactly Happens in Rebalancing at DWM? |
 Many of you may have noticed the recent flurry of Schwab trade confirmations as a result of our recent semi-annual strategic rebalancing. To keep you abreast with what's happening at DWM and your portfolio, here's a little insight on our trading procedures.
We have both tactical (e.g. DWM Liquid Alternatives) and strategic (e.g. ETF Aggressive, ETF Defensive, Mutual Fund Aggressive, Mutual Fund Defensive, etc) models in place for our client portfolios. As you know, we do not adhere to a BUY AND HOLD approach. Hence these models are traded actively, typically twice per year. Tactical models are rebalanced in the even quarters (i.e. 2Q and 4Q) and strategic models rebalanced in odd quarters (i.e. 1Q and 3Q). Models can be traded more often if necessary.
So what happens in a rebalancing? Let's discuss the most recent rebalance done in the last few weeks for clients following strategic models which means the ETF Model Portfolios or the SAM Mutual Fund Model Portfolios. Each of these models have different risk profiles from lower risk / lower return ("Defensive") to higher risk / higher return ("Aggressive").
When picking the individual ETFs or MFs securities for inclusion in our model, we look at several factors which include Morningstar and other ratings, expense ratio, style purity, Modern Portfolio Theory data like Sharpe Ratio and standard deviation. We also look at how long the management has been in place, what kind of turnover activity they have, and their performance track record.
From there, we choose the security we think best complements the rest of the model. Securities are chosen to be held long-term. Hence, for strategic models, we don't usually have many name changes. But it does happen. For example, Pimco Total Return Bond Fund has been a great core bond fund and an anchor in our strategic model portfolios that include fixed income for a long time. However, as its popularity has soared so has its size. A fund can run into issues when it gets too big. For example, it may be more difficult for the fund manager to trade as fund size increases. For this and other reasons, we have sold the Pimco Total Return Bond Fund and have established new positions in Double Line Total Return and Loomis Sayles Bond Fund. Loomis is an established traditional bond player and DLNTX offers a more absolute return approach by being able to short bond securities.
We also strive to optimize our weightings amongst the particular names and investment styles. For example, we don't think inflation is as big as a threat now as it was 6 months ago. That being said, we significantly reduced our target allocation in TIPs in this latest rebalance. Another example is more with style: we think value (think dividend stocks) will slightly outperform growth in the near term so our latest rebalance provided a value tilt to the portfolios.
Our sophisticated trading technology allows us to efficiently rebalance these portfolios globally via blocked trades. Hence, all clients following a pure strategy get the same executed price.
So now you know what all those trading confirms are about. It's not that we hate trees. |
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Business: Soda Fountain Revival |
If you are looking for something new to drink-more interesting than a cocktail or soda- you may want to look at the past. Way back in the 19th century, pharmacists and soda-jerks created all sorts of exotic, lip-smacking sensations. Today, across the country, soda fountains are coming back.
Darcy O'Neill, author of Fix the Pumps, a history of the golden age of soda fountains, explains the beginning this way: "The pharmacist was the catch-all for everything. They were expected to diagnose and treat most every ailment." There were no pills. The pharmacists developed hand-crafted remedies, using ingredients that were often vile. Customers would pick up their foul-tasting medicine and walk to the other side of the counter, where the soda jerk combined it with fizzy mineral water and sweet syrups and bitters to make the medicine go down easier.
Mr. O'Neill says that in 1875 there was a soda counter in almost every American city. It was the equivalent to the local saloon. When soda fountains were at their peak, around the turn of the century, food transport and refrigeration were still in their infancy. Soda fountains made their own syrups and toppings. Fresh milk and cream were trucked in daily and every drink was mixed to order. The soda jerks got their names from the jerking motion used to pull the taps. For many working people, their concoctions were not just drinks, they were quick meals.
Soda fountains were impacted greatly in the 1930s by three major events. First, FDR signed the 1933 repeal of Prohibition, allowing American adults to return to saloons and bars. Second, J.G. Kirby opened the first drive-in in 1936, sparking a new national craze. Third, the bottle cap was invented. Now, people could get a soda at the gas station instead of having it mixed for them at the fountain.
The soda jerks evolved. They developed rich, creamy treats, like the milk shake and the malt. Egg cream soda, orange cream soda, and root beer floats became the new craze. Later on, mass-produced branded syrups in spectacular colors like Cherry Smash, Green River and Ward's Orange Crush took over at the taps.
Today, a small group of modern soda jerks are trying to bring back the soda fountain. Places like Blueplate in Portland, the Franklin Fountain in Philadelphia and Brooklyn's Farmacy & Soda Fountain are leading a revival. They are bringing up-to-date culinary values-seasonal, house-made, ripe, local- to ice cream sodas, sundaes and egg creams. In the process, they have uncovered forgotten and delicious flavors like sassafras, phosphoric acid and teaberry.
Are you ready to head back to the future?
For more information: http://www.npr.org/2011/01/140093866/in-soda-revival-fizzy-taste-bubbles-go-from-the-past |
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DWM News:
Enhanced Client Portal & Charleston Seminar 9/27 | |
One of the greatest things about being an independent RIA is being able to choose the very best products and offerings for our business which ultimately transcends to a better client experience.
The client portal part of our website - the place where you log in and get all your up-to-date account info - is run by a group out of Omaha, Nebraska called Orion Advisory services. Orion works with over 200 RIAs like us and continually pushes the envelope when it comes to technology.
That being said, the next time you log in, you'll have a new enhanced landing page. This new dashboard gives you a quick, simplified view of your portfolio's allocation, recent activity, and performance. You have the ability to drill down into any of the areas and continue to have the ability to generate the usual historical reports.
And speaking of drilling down, you now have the ability to click on most of the securities listed on your dashboard to bring up a detailed analytical review of that offering. For example, you may want to know more about that ABC corporate bond that matures in 2018. Well, you can simply click on it and you will get its profile, its S&P rating, its historical performance, and more.
Orion also powers our DWM mobile app. Pretty much everything that is found on the website can also be found here, but at the convenience of your smartphone or tablet PC (like an iPad). If you haven't downloaded it yet, you should do so by going to your app store (i.e. Apple iTunes or Droid app store). Your login and password are the same as your DWM website credentials.
DWM, with the power of Orion's resources, provides some great portfolio account information via the web, mobile apps, and paper statements. We encourage you to check them out. If you need any assistance and/or want to understand what you're looking at better, just give our team a call.
Also, Charleston area clients, prospects and friends should plan to join us on September 27, 2011 when DWM presents "Proven Investment Solutions for Volatile Times" at the Charleston Harbor Resort from 8:00-10:15 a.m. Charlie Capasso and Les Detterbeck will present a review of the markets, a discussion of what the future holds for investors, keys for re-evaluating risk tolerance, examples of proven investment strategies and an outline of proven wealth strategies. Please call Amy Venditti at 843-577-2465 if you wish to attend or obtain additional information.
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