Issue: #  67JULY 2014
Bautis Financial
Dear ,
 

Welcome to July 2014 issue of The Wealth Chronicle!

 

FIRST HALF MARKET UPDATE

 

Stocks aren't on fire as they were in 2013, but a 6.05% advance in the S&P 500 since the start of the year, most of which came in the second quarter, is respectable.

 

We have a Federal Reserve that is still telling us it plans to hold the fed funds rate near zero for "a considerable period" after its bond buys cease. Thus far the Fed has reduced its monthly bond purchases from $85 billion each month to $35 billion each month. Quantitative Easing is likely to cease later in the fall. The tapering of bond buys seems to have slowed the bullish juggernaut earlier in the year.

 

Over the pond in Europe, the Central Bank (ECB) has been increasingly suggesting that it may embark on its own version of quantitative easing as a way of dealing with an annual inflation rate of just 0.5%.

 

Corporate profits continue to grow.  Earnings for S&P 500 companies increased by a modest 5.6% in the first quarter of 2014, and Thomson Reuters estimates that profits will rise by 6.2% in the second quarter. 

 

Here's a handy reference guide that compiles market returns and economic data as of June 30, 2014.  Market performance includes data for a wide variety of asset classes, sectors, mutual funds, indexes, and more.  


 
Sectors
Fueled by rising energy prices and the crisis in Iraq, energy led the way with an 11.45% rise during Q2.  But given the bullish tone in equities, the surge in utilities, which added 6.78% in teh quarter seems a bit puzzling.



RATING YOUR 401K PLAN

 

Company provided 401(k) plans are a fantastic perk, but not all are created equal. Peggy Collins of Bloomberg News spent six months researching company filings and has come up with a list of the best, and worst, company 401(k) plans.

 

Collins says when it comes to evaluating a plan, they looked at "what levers a company can pull to give people the best or worst shot at saving enough for retirement." These levers include the match rate, any additional contributions from employers -- some companies give you money whether you put in money or not. They also looked at factors like vesting, or how long you have to stay at a company until you can get the matching contribution, and the availability of index funds.

 

Topping the list: Oil and natural gas producer ConocoPhillips (COP) and tobacco company Philip Morris (PM). Collins tells us ConocoPhillips has a generous match, where an employee can put in one percent and Conoco will match you nine times that. "They're helping people young in their careers get a huge jumpstart, and then have 40 years potentially to see that money grow and compound," says Collins.


 


 

 

ConocoPhillips estimates that an employee could retire at 60 after 35 years of service with savings of $3.8 million, adjusted for inflation, assuming a starting salary of $75,000 and increases of 4 percent a year.

 

Some of the names near the bottom of the list may be surprising. Social media company Facebook (FB) came in dead last, while Amazon (AMZN) and Whole Foods Market (WFM) were near the bottom of the 250 largest companies by market capitalization that Bloomberg ranked.

 

Collins explains that Facebook had no match for the year that they rated the 401(k) plan, which is why it ranked at the bottom, but now Facebook is matching 3.5% of salaries if an employee puts in 7%.

 

A common misconception is that even if you are no longer working for the company they will be contributing the match to your account. Once you stop working for a company you are no longer allowed to contribute to that company's 401k plan, nor will the company add any money to your account.  You will have 60 days to pay back any loans.  The determination of what to do with your 401k plan after termination takes an analysis of 4 or 5 different options.  You can read about what things to look for in my 401k Whitepaper. 

 

THE RISKS OF CD'S

 

The concept of a CD is pretty straightforward. You hand over a sum of money to the bank when purchasing a CD. The CD accrues interest and at a certain point in the future the bank gives you your principal bank plus all of the interest that has built up.  he likelihood of the bank defaulting and not paying you back your principal is low, and CD's are recognized and valued as low-risk savings vehicles. But like all financial products, they carry some degree of risk and there are several factors you should keep in mind. 

 

 

 

Early Withdrawal Penalties - If you need to take money out of your CD account before the maturity date.  Those penalties vary from bank to ban, but there is no legal maximum on them, so the risk on this front varies widely.  That's why it's important to know - upfront - what your bank's penalties are.  There are "No Penalty CD's", however the interest rate you'll be paid for them is less than you would receive for a regular CD.

 

Tax Liabilities - Interest on a CD account is probably taxable at the individual's normal tax rate.  The lower dividend and/or capital gains rates may not apply.

 

Reinvestment Risk - the concern that if interest rates go down and your existing CD account with relatively higher interest matures, you may have to roll over the CD at the lower rate.  Thankfully we probably won't have to worry about this one now as interest rates are at historic lows.

 

Inflation Risk - the possibility that over the long run, inflation will outpace your CD account's interest earnings. 

Fees - Not only is the promise of higher return associated with greater risk, but some of these investments have higher costs as well.

 

Is the CD callable? Some investments are callable after a period of time which means that the issuer can redeem the investment prior to the investment reaching maturity.

 

Risk from the limits of FDIC insurance - It's important to remember that whatever the DIC insurance limit is for your particular account and registration, the limit is for that financial institution - it's not per CD.  It's unlikely that you will ever need that insurance, but it's good to be aware of the potential risk as well as all the ways you can maximize your FDIC insurance limits.

 

CD's can be a good addition to the conservative portion of your portfolio, however it's important to understand the risks that come with them.

 

DON'T CRY FOR ME ARGENTINA

 

Not only did Argentina lose the World Cup final in a heartbreaker this month to Germany, they now must turn their attention to a problem that could potentially once again cripple their economy.

 

In 2001, Argentina succumbed to what was at the time, the largest sovereign default in history. Public debt in Argentina as a percentage of GDP reached had reached 166% and with an unemployment rate exceeding 21%, Argentina had no other option but to miss payments on their bonds. 

 

Since 2003 a new Argentine government has implemented a debt management strategy under the premise that it was necessary to resume economic growth in order to be able to service debt. There has been progress and over the past ten years the domestic economy has grown steadily.  Argentina is the second largest economy in South America behind Brazil.

 

Argentina's economic progress over the past 10 years was helped by a deal they made with their creditors.   Under the deal, 92% of bondholders agreed in 2005 and 2010 to write off two-thirds of the bonds' pre-crisis value.  This provided Argentina with time to rebuild its economy.  Restructuring deals are voluntary between the borrower, in this case Argentina, and its creditors. Bondholders are not obliged to agree to a devaluing of their debt, but risk a full default and loss of all their funds if they don't.

 

Some investors may buy debt ahead of a restructure and bet that they can demand a better deal.  This is what a group of US hedge funds led by billionaire Paul Singer did.  They bought the Argentina bonds for pennies on the dollar while the economy was in turmoil in 2001 and then demanded to be paid the full dollar back.  The Argentine government has been in a 12-year legal battle in the US courts, arguing that this is unreasonable and that the hedge funds are engaging in blatant profiteering.  The charge of the hedge funds engaging in profiteering is not a shock as that is what the mission of most hedge funds is.

 

Earlier this month, the US Supreme Court ruled that Argentina must pay the hedge funds that had refused to participate in the debt restructuring deal the full $1.3billion value of the debt.  Payments on the restructured bonds come due on June 30th; after that, there is a month long grace period-some maneuvering room-and then Argentina will officially be missing its payments on the bonds it has spent years trying to pay back. 

 

There are two possible outcomes, either Argentina negotiates with the holdout creditors (since paying them back in full is all but impossible), or it would once again default on its debt. 

 

The Supreme Court's decision will make it more difficult for other countries to restructure its debts in an arbitrary and unjust manner. It should also lead to an improvement of the legal frameworks governing defaults by sovereign countries.

 

Some economists have suggested that the rulings will disrupt or impede future sovereign debt restructurings by encouraging holdout creditors to litigate for full payment instead of participating in negotiated exchange offers. They argue that incentives for holdout litigation are not limited because of significant constraints on creditor litigation, substantial economic costs associated with such litigation, and the availability of contractual provisions and negotiating strategies that mitigate the debtor's collective action problems. They also claim that the fact-specific equitable remedy in the Argentina case was narrowly tailored to Argentina's unprecedented disregard for court opinions and for international norms of negotiating sovereign debt restructurings and is therefore unlikely to be used in future debt restructurings.

 

Lionel Messi couldn't bring a World Cup back to Argentina, maybe they need to bring Diego Maradona out of retirement to negotiate with the hedge funds to save the economy.

 

WATERCOOLER

 

 

Forbes list of the top 50 most valuable sports teams - 4 of the top 10 valued franchises are soccer teams.  Maybe the Red Bulls will crack the top 50 next year

 

 

Rory McIlroy's father had enough faith in his son's golf skills at age 15 that he wagered $612 that Rory would win the British Open by age 25.  Rory, now 22, won the British Open this year winning his father $306,351.

 

 

 

 


 

Who says there is no inflation - Hershey Raises Candy prices 8%

 

 

 

 

 

Please contact me if you have any questions about the articles above or about your personal or business finances.

  

Sincerely,

Marc Bautis
Wealth Manager

 

office: 201-842-7655
cell:    201-221-6895
fax:    201-754-9760
Disclaimer:The information contained in this newsletter is for information purposes only and may not be suitable for your specific financial situation.  You should consult a financial advisor before making any investment decisions relating to the information contained in this newsletter

What's Inside?
First Half Market Update
Rating Your 401k Plan
The Risks of CD's
Don't Cry for Me Argentina
Marc Headshow w Skyline, 9-2011
MEET MARC  

Marc Bautis is a Wealth Manager specializing in working with young families as well as retirees and those nearing retirement. He understands that everyone wants to not only protect their principal, but also be sure that their money lasts.  He is committed and proud to deliver independent advice, always in the interest of his clients.

Marc is the creator of the Retirement Fitness Challenge™,  a program designed to be sure his clients enjoy the retirement years as they have always envisioned them.  Marc's program is designed to prevent outliving your money but also to minimize expenses during retirement and find the best time to start taking Social Security benefits.   Marc is also the author of a recent book The Retirement Fitness Challenge: Shape Up Your Finances and Make Your Money Last a Lifetime, which is available on Amazon.com.

Marc is a graduate of Seton Hall University.  He is a Bergen County native, from Lyndhurst, where much of his extended family still resides. He currently lives in Glen Ridge with his wife Katie, new daughter Charlotte and Old English Bulldog, Winnie.

 

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