We have just been through a volatile three months, a period where domestic indicators, energy prices and foreign economic bulletins weighed heavily on U.S. consumers, companies and financial markets. Here are some details worth noting.

The quarter in brief. For the first time in four quarters, U.S. stocks did not advance. The S&P 500 lost 0.39% in 2Q 2011, a quarter marked by worries over the debt carried by multiple European nations, the wrap-up of the Fed’s second installment of quantitative easing, high gas prices and indications that the recovery was stalling. Yet as June ended, encouraging domestic indicators and better headlines from overseas helped to renew the collective appetite for risk.1

Domestic economic health. Much was made of the “soft patch” the economy had entered into this spring. Some key indicators seemed to confirm it. Consumer spending – which had increased by 0.6% in March – was just +0.3% for April and flat for May. When adjusted for inflation, personal spending actually decreased by 0.1% in both those months. Retail sales were up 0.3% in April, down 0.2% in May. On the other hand, durable goods orders – down 2.7% in April – improved by 1.9% in May.3,4

Unemployment actually increased in the quarter. In March, the jobless rate was at 8.8%; in May, it had climbed back up to 9.1%. By May, annualized inflation had cranked up to 3.6%, and gasoline prices had risen 36.9% in a year. On the bright side, monthly consumer price increases had moderated: after 0.5% gains in the federal government’s Consumer Price Index in February and March, prices respectively advanced by just 0.4% and 0.2% in April and May. Wholesale inflation was more pronounced, what with energy costs and supply disruptions in the wake of the March earthquake and tsunami in Japan: producer prices increased by 0.8% in April and 0.2% for May, bringing 12-month wholesale inflation to 7.3% in May compared to 5.8% for March.5,6,7

As for the key American snapshot of the manufacturing and service sectors, the Institute for Supply Management’s non-manufacturing index went from 54.6 in May to 53.3 in June; its manufacturing gauge defied expectations, moving north to 55.3 in June from May’s 53.5 reading.8

In April, citing concern over the ballooning U.S. deficit, Standard & Poor’s cut the credit outlook for America from “stable” to “negative”. Moody’s Investors Service made no such move. The federal debt ceiling was reached on May 16, and Treasury Secretary Timothy Geithner noted a hard deadline of August 2 to raise the debt cap. Congress mostly dithered on the issue during May and June, playing politics first and striving for compromise second. The Federal Reserve’s second round of quantitative easing ended June 30 and the impact wasn’t as harsh as feared: though the end of QE2 meant the end of $600 billion thrown at the bond market, bond yields and stock prices actually increased slightly on July 1.9,10,11

Global economic health. As the quarter ended, Greece seemed poised to stave off a near-term default with $17 billion more in loans from the International Monetary Fund and the European Union. Greece’s parliament passed an austerity bill on June 29 including $40 billion in tax hikes and budget cuts.12
That wasn’t the only notable economic development in Europe in the quarter. The European Central Bank raised its key interest rate to 1.25% (and seemed poised to raise it again in early July), making a move before the Bank of England and the Fed. Annualized inflation in the Eurozone was at 2.8% in April; it ticked down to 2.7% by June. Retail sales in the EU slumped by 1.1% in May, and by 2.8% in Germany. On the upside, Germany’s manufacturing orders rose by 2.9% in April and 1.8% in May, and German business confidence improved in June.13,14,15

China’s official manufacturing index declined in each month of the second quarter, falling to 50.9 by June. Its annualized inflation rate hit 5.5% in June, the highest in 34 months. Elsewhere, there were other signs of a slowdown: India’s PMI slipped in both May and June, reaching a low unseen since September. The key PMIs in South Korea and Taiwan also fell, with Taiwan’s showing sector contraction. Business sentiment in Japan fell to its lowest level in five quarters in 2Q 2011, an effect of the triple tragedy the nation suffered in March.16,17

World markets. The world’s major stock market indices posted widely varying quarterly results. In Europe, Germany’s DAX advanced a healthy 4.8%, and Ireland’s ISEQ gained 2.7%; England’s FTSE 100 managed to gain 0.6%, while the Dow Jones STOXX 600 slipped 1.1%. While the Nikkei 225 actually advanced 0.6% for 2Q 2011, many indices in Asia did not (Kospi, -0.3%; Sensex, -3.1%; Hang Seng, -4.8%; All Ordinaries, -4.8%; Shanghai Composite, -5.7%). Brazil’s Bovespa went -9.0% for the quarter. The MSCI World and Emerging Markets indices respectively lost 0.28% and 2.11% last quarter.18,19,20,21

Commodities markets. While May and June were trying, the quarterly performances were not all bleak. Reviewing metals on the COMEX, we see that gold gained 4.4% (its eleventh positive quarter in a row) to go +5.7% for the year. Other metals posted quarterly losses (silver, -8.1%; platinum, -3.2%; palladium, -0.9%). The U.S. Dollar Index retreated 2.2% for the quarter.22,23

Moving to energy and crops, oil lost 10.6% in 2Q 2011 for its worst quarter since 4Q 2008 as the International Energy Agency elected to free up global reserves. While several key crops have had a great run over the past 12 months, the quarter was not kind to them: corn lost 10.0%, soybeans slipped 8.2% and wheat lost 20.0%. Rice pulled off a 6.1% quarterly advance.24,25

Real estate. Instead of a bottom, we got a double dip: in June, the April S&P/Case-Shiller Home Price Index came out and revealed a 4.0% year-over-year decrease in collective house prices across 20 metro areas. As for other barometers, June existing home sales (as measured by the National Association of Realtors) were down 15.3% from a year ago while June new home sales were up 13.5% from a year before.26,27,28

Mortgage rates fell in the quarter. Here were Freddie Mac’s Primary Mortgage Market Survey interest rate averages from March 31: 30-year FRMs, 4.86%; 1-year ARMs, 3.26%; 15-year FRMs, 4.09%; 5-year ARMs, 3.70%. The numbers from the June 30 survey: 30-year FRMs, 4.51%; 1-year ARMs, 2.97%; 15-year FRMs, 3.69%; 5-year ARMs, 2.97%.30

Looking back … looking forward. The mixed 2Q performances of the major indices aren’t so bad when you consider the volatility (and swoon) of June.1

The new quarter begins with a few questions. Will a QE3 be needed? Will inflation become more of a factor? Will cheaper commodities help U.S. companies? Will Greece require further bailouts or loans before 2011 ends? Are Spain, Italy and Portugal next on the EU/IMF rescue list? How long can world financial markets put up with inaction on the U.S. debt ceiling? And finally, will Wall Street earnings be as impressive as some analysts think?

Citations:
1 – blogs.wsj.com/marketbeat/2011/06/30/data-points-u-s-markets-27/ [6/30/11]
2 – bea.gov/newsreleases/national/pi/pinewsrelease.htm [6/27/11]
3 – census.gov/retail/marts/www/marts_current.pdf [6/14/11]
4 – bloomberg.com/news/2011-06-24/u-s-advance-report-on-durable-goods-for-may-text-.html [6/24/11]
5 – data.bls.gov/timeseries/LNS14000000 [6/29/11]
6 – bls.gov/news.release/cpi.nr0.htm [6/15/11]
7 – bls.gov/news.release/ppi.nr0.htm [6/14/11]
8 – ism.ws/ISMReport/MfgROB.cfm [7/6/11]
9 – money.usnews.com/money/business-economy/articles/2011/04/18/what-sps-us-outlook-downgrade-means [4/18/11]
10 – money.cnn.com/2011/05/16/news/economy/debt_ceiling_deadline/index.htm [5/16/11]
11 – fool.com/how-to-invest/personal-finance/savings/2011/07/05/what-does-qe2s-ending-mean-to-you.aspx [7/5/11]
12 – huffingtonpost.com/2011/06/29/greece-austerity-bill-greek_n_886760.html [6/29/11]
13 – online.wsj.com/article/SB10001424052702303544604576429731982195632.html [7/6/11]
14 – smh.com.au/business/world-business/euro-zone-retail-sales-slump-in-may-20110706-1h19l.html [7/6/11]
15 – bloomberg.com/news/2011-07-06/german-factory-orders-rise-on-domestic-demand.html [7/6/11]
16 – news.xinhuanet.com/english2010/china/2011-07/01/c_13960799.htm [7/1/11]
17 – finfacts.ie/irishfinancenews/article_1022654.shtml [7/1/11]
18- online.wsj.com/article/SB10001424052702303627104576413833704779332.html [7/1/11]
19 – online.barrons.com/article/SB10001424052702303627104576413800819281550.html [6/30/11]
20 – online.wsj.com/article/SB10001424052702303763404576416263003588324.html [7/1/11]
21 – mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [6/30/11]
22 – bullionpricestoday.com/bullion-prices-mixed-in-second-quarter-2011/ [6/30/11]
23 – online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_curr_dtabnk&symb=DXY [7/6/11]
24 – blogs.wsj.com/marketbeat/2011/06/30/data-points-energy-metals-494/ [6/30/11]
25 – businessweek.com/news/2011-07-01/corn-extends-worst-monthly-loss-since-2008-on-acreage-increase.html [7/1/11]
26 – blogs.forbes.com/morganbrennan/2011/06/29/what-can-homeowners-learn-from-case-shillers-home-price-index/ [6/29/11]
27 – realtor.org/wps/wcm/connect/04f71400474c15ff808c8e0e6e9f088e/REL1105EHS.pdf [6/21/11]
28 – census.gov/const/newressales.pdf [6/23/11]
29 – freddiemac.com/pmms/ [7/5/11]
30 – bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=6%2F30%2F10&x=0&y=0 [7/6/11]
30 – bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=6%2F30%2F10&x=0&y=0 [7/6/11]
30 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=6%2F30%2F10&x=0&y=0 [7/6/11]
30 – bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=6%2F29%2F01&x=0&y=0 [7/6/11]
30 – bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=6%2F29%2F01&x=0&y=0 [7/6/11]
30 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=6%2F29%2F01&x=0&y=0 [7/6/11]
31 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [7/6/11]
32 – treasurydirect.gov/instit/annceresult/press/preanre/2001/ofm11001.pdf [1/10/01]

Amid all the hype and euphoria, some history is worth remembering.

America’s got gold fever. Internet headlines inform you that gold settled at another record close today. Nightly news segments show you footage of excited sellers and beaming commodities traders. Radio commercials remind you that gold has outperformed stocks in the last decade. How should you respond to all this?

There’s no doubt that in recent history, the performance of gold is startling. Across the 2000s, gold gained 278.52% on the COMEX while the S&P 500 lost 24.10%. In 2010, the S&P 500 advanced 12.78% and gold notched a 29.76% gain. _1,2,3

So given these numbers, why doesn’t everyone put every dollar they have into gold?

Recent price returns don’t tell the whole story. Investing big in gold may seem like a no-brainer – until you take history and inflation into account. In 1980, gold prices were up around $850 an ounce – adjusted for inflation, that’s the equivalent of about $2,300 an ounce today. Yet when 2008 ended, gold prices were at just $870 an ounce. When 2003 started, gold futures were trading at $343 per ounce. _4,5,6

Gold is often seen as a hedge against inflation – but from 1980-2002, annualized inflation averaged 3.55% and gold didn’t exactly keep pace. So if you lengthen the window of historical performance, gold hasn’t always trumped stocks. ₆

Remember, gold is a commodity. Since it tends to have little correlation with stocks and bonds, it can play a significant role in a diversification strategy. On the other hand, gold has no intrinsic value. It doesn’t give you any cash flow. It doesn’t pay you a dividend or earn interest. Gold is only worth what people are willing to pay for it.

Right now, people are willing to pay more than $1,500 an ounce for gold. Three big factors have driven this gold rush – a consistent global demand, an assumption that the dollar will stay weak and a whole lot of speculation.

Bubbles can happen; bubbles have happened. Investors who bought gold at $560 an ounce at the start of 1980 had to wait until 4Q 2010 to break even in inflation-adjusted terms. Those who bought gold at $850 an ounce in 1980 won’t effectively break even until gold prices top $2,300. Gold has performed astonishingly well in recent years – but past performance is no guarantee of future success. ₂

Citations.
1 – cnbc.com/id/34645043 [12/31/09]
2 – blogs.wsj.com/marketbeat/2010/12/31/data-points-us-markets-337/ [12/31/10]
3 – blogs.wsj.com/marketbeat/2010/12/31/data-points-energy-metals-430/ [12/31/10]
4 – marketwatch.com/story/why-gold-is-a-bad-investment-2010-11-12 [11/12/10]
5 – seekingalpha.com/article/113174-2008-precious-metals-performance-gold-silver-platinum [1/4/09]
6 – montoyaregistry.com/Financial-Service.aspx?financial-service=retirement-planning&category=3 [5/1/11]

Centaurus Financial does not give personalized tax, legal, or accounting device. Please consult with your tax advisor for an opinion regarding your specific tax situation. Information is believed to be from reliable sources; however, we make no representations as to its completeness or accuracy.

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THE QUARTER IN BRIEF
The consumer was the hero of the fourth quarter. In the last three months (and especially in the last six weeks), consumers opened their wallets and pocketbooks and grew more confident about the state of the economy. In Washington, the President and Congress collaborated to devise short-term fixes for America’s major tax issues. The Federal Reserve announced plans for another round of monetary easing. There were signs of hope for the housing market, but also signals that home prices had yet to bottom out. We didn’t see a reduction in unemployment. Yet when all was said and done, the S&P 500 had gained 10.20% for the quarter.¹

DOMESTIC ECONOMIC HEALTH
In December, the Commerce Department told us that consumer spending accelerated to an annualized pace of 2.4% during the third quarter. It improved by 0.7% in October and 0.4% in November – meaning five straight months of increases. By the end of December, the Reuters/University of Michigan consumer sentiment index indicated a peak of confidence among consumers unseen since June.^2,3,4

Retail sales increased by 1.7% in October and 0.8% in November, Commerce Department figures indicated. MasterCard’s SpendingPulse eCommerce Index measured a 15.4% increase in year-over-year online sales between October 30 and December 23. By December, chief economists at Wall Street firms had revised their estimates of 4Q 2010 consumer spending upward – Morgan Stanley forecast +4.4%, JPMorgan Chase +4.0% and IHS Global Insight +4.2%.^4,5,6

All consumers could rejoice about the tax accord struck in the nation’s capital in December. The fight over extending the Bush-era tax cuts to the wealthiest Americans turned out to be little more than a skirmish. Following a compromise between President Obama and Congressional Republicans, the 2010 Tax Relief Act became law on December 17. It extended the Bush-era tax cuts for all Americans through 2012, cut (employee) payroll taxes by 2.0% for 2011, and extended federal unemployment benefits for another 13 months. It also brought back the estate tax at 35% with a $5 million individual exemption.^7,8

The Federal Reserve decided to use one of the few options it had left to try and stimulate inflation and the broad economy. In early November, it said it would buy $600 billion worth of Treasury bonds by mid-2011, and it stated plans to purchase up to $900 billion in debt by the end of 3Q 2011. The possible effects: lower long-term interest rates, lower bond yields and a weaker dollar, all factors which could make equities and real estate more attractive investments. Detractors saw the potential for stock and commodities bubbles – and a trade war, as U.S. exports could become cheaper as a consequence.⁹

The jobless rate was 9.6% in October and 9.8% in November. Yet by Christmas, initial claims had fallen to a seasonally adjusted 388,000, 40.4% below the recessionary peak of 651,000 reported by the Labor Department in March 2009.^10,11

America’s manufacturing and service sectors appeared healthy, at least by the twin surveys at the Institute for Supply Management. Its December reports found the service sector rate of expansion improving 2.1% in December to 57.1% and the manufacturing sector rate of expansion improving 0.4% to 57.0 for December. The service sector had been expanding for the past 12 months.¹²

GLOBAL ECONOMIC HEALTH
In Europe, the big news of the quarter concerned debt ratings. Moody’s Investors Service slashed Ireland’s credit rating by five levels in mid-December, and both Moody’s and Standard & Poor’s indicated that Portugal could be in line for a downgrade. Spain’s credit rating and Greece’s bond rating were also put up for review by Moody’s. S&P lowered its debt rating of Belgium late last month, while Fitch downgraded the credit rating of Hungary (not an EU member) to just above junk status.^13,14

In the Asia Pacific region, all eyes were on a) China’s central bank and b) the continuing tension between North Korea and South Korea. In October, China reported its annualized growth slowing to 9.6% in the 3Q with inflation hitting its highest level in two years in September (3.6%). China’s central bank raised its benchmark interest rate twice in the quarter; at this writing, it is 5.81%. We learned third-quarter growth had been very strong in India (8.9%) and yes, even in Japan (4.5%). Economies across the region grew worried about the Fed’s bond-buying initiative, with its potential to boost the risk of asset bubbles and inflation.^15,16

WORLD MARKETS
The 4Q saw most of the world’s benchmarks adding to YTD gains. England’s FTSE 100 rose 6.3% in the quarter and the broader Dow Jones Stoxx Europe 600 advanced 6.2%. The Nikkei 225 was up 9.2% for the quarter, and Taiwan’s TAIEX rose 8.9%. Gains like these resulted in some very pleasant year-end numbers for some notable indices: South Korea’s KOSPI, +21.9%; Mexico’s IPC All-Share, +20.0%; India’s Sensex, +17.4%; Germany’s DAX, +16.1%; Canada’s TSX Composite, +14.4%. Other indices racked up lesser annual gains (FTSE 100, +9.0%; Hang Seng, +5.3%; Bovespa, +1.0%). Some indices slipped for 2010, even after a good 4Q: the Australia All Ordinaries index (-2.6%), the Nikkei 225 (-3.0%), the CAC-40 (-3.3%) and especially the Shanghai Composite (-14.4%). The MSCI World Index had an +8.55% quarter en route to a +9.55% 2010 return, and the Emerging Markets Index posted a 4Q return of +7.05% to go +16.36% for the year.^{17,18,19,20,21}

COMMODITIES MARKETS
Bulls ran rampant. Oil notched a 14.27% gain for the quarter on its way to a +15.15% year and a year-end price of $91.38 a barrel. Gold gained 8.66% in 4Q 2010 to settle at $1,421.10 per ounce on New Year’s Eve. Copper gained 21.76% for the quarter. Across November and December alone, gold prices went up $100, silver prices rose 25%, copper prices climbed almost 20% and oil futures gained $12. Consequently, we saw some spectacular yearly gains for precious metals – 29.8% for gold, 83.7% for silver (not a misprint), 96.5% for palladium (not a misprint either), and 20.9% for platinum. In crops, sugar prices continued a climb of 93.5% from a June trough, concluding 2010 up 51.8%; coffee ended up 76.8% for 2010 while wheat rose 46.7% and soybeans gained 34.1%.^22,23,24,25

REAL ESTATE
We know that existing home sales went north 5.6% in November after slipping 2.2% for October. We also know that the pace of new home sales improved by 5.5% for November after falling 10.1% in October (and rising 12.0% in September); new home prices were also up 8.0% for November. Is this anything like good news, or hope to build on? Maybe not. Unemployment, foreclosures, and several months of inventory overhang remained central dilemmas. Pending home sales, however, did rise for two straight months. They soared 10.0% (a record) in October and improved by another 3.5% in November.^26,27,28

This was the quarter in which mortgage interest rates finally went up. In fact, they went up about half a point on fixed-rate loans. Freddie Mac noted the rise in average rates in its September 30 and December 30 Primary Mortgage Market Surveys: 30-year FRMs, 4.32% to 4.86%; 15-year FRMs, 3.75% to 4.20%; 5-year ARMs, 3.52% to 3.77%; 1-year ARMs, 3.48% to 3.26% (average rates actually declined).²⁹

LOOKING BACK…LOOKING FORWARD
The Fed’s bond-buying program (nicknamed QE2 by the media) and the mid-term elections (which gave Republicans control of the House of Representatives) helped to encourage stock market investors. Across 2009-2010, the S&P 500 gained 39.23%, the DJIA 31.92% and the NASDAQ a remarkable 68.22%.¹

As the first quarter gets underway, there seems to be a renewed sense of optimism permeating the investor community and the media. The big red flags are mostly overseas – debt in Europe, the strong possibility of China’s government putting some brakes on its growth. The recent spike in mortgage interest rates puts pressure on a housing recovery (perhaps rising rates will be subdued as a byproduct of QE2). At home, we seem to be witnessing renewed demand from the consumer, and we all know what the pleasant consequences of that might be – a boost in production, a related wave of hiring, and a perception of increasing prosperity and affluence that is good for both Main Street and Wall Street.

Citations.
1 – blogs.wsj.com/marketbeat/2010/12/31/data-points-us-markets-337/ [12/31/10]
2 – news.yahoo.com/s/nm/20101223/bs_nm/us_usa_economy_spending [12/23/10]
3 – bea.gov/newsreleases/national/pi/pinewsrelease.htm [12/23/10]
4 – csmonitor.com/Business/2010/1223/In-boost-for-economy-consumer-spending-and-confidence-post-gains [12/23/10]
5 – cnbc.com/id/40795423 [12/23/10]]
6 – bloomberg.com/news/2010-12-14/retail-sales-prompt-economists-to-raise-u-s-spending-forecasts.html [12/14/10]
7 – foxbusiness.com/markets/2010/12/17/obama-signs-tax-law/ [12/17/10]
8 – online.wsj.com/article/SB10001424052748703296604576005430598327972.html [12/7/10]
9 – money.cnn.com/2010/11/03/news/economy/fed_decision/index.htm [11/3/10]
10 – bls.gov/news.release/empsit.nr0.htm [12/3/10]
11 – usatoday.com/money/economy/2010-12-23-unemployment-income-durable-goods_N.htm [12/25/10]
12 – ism.ws/ISMReport/NonMfgROB.cfm [1/5/11]
13 – bloomberg.com/news/2010-12-23/portugal-s-long-term-issuer-default-rating-is-cut-to-a-from-aa-by-fitch.html [12/23/10]
14 – online.wsj.com/article/BT-CO-20110104-702871.html [1/4/11]
15 – biz.thestar.com.my/news/story.asp?file=/2010/12/25/business/7681425&sec=business [12/25/10]
16 – guardian.co.uk/world/2010/dec/27/china-interest-rate-hike-markets [12/27/10]
17 – blogs.wsj.com/marketbeat/2010/12/31/data-points-europe-114/ [12/31/10]
18 – in.reuters.com/article/idINIndia-53840720101230 [12/31/10]
19 – cnbc.com/id/40860397 [12/31/10]
20 – online.wsj.com/article/SB10001424052748704543004576052114049166444.html [1/3/11]
21 – mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [12/31/10]
22 – blogs.wsj.com/marketbeat/2010/12/31/data-points-energy-metals-430/ [12/31/10]
23 – cnbc.com/id/40910656 [1/4/11]
24 – coinnews.net/2011/01/02/gold-prices-mark-10th-annual-gain-silver-soars-83-7-palladium-leads-in-2010/ [1/2/11]
25 – online.wsj.com/article/SB10001424052748704610904576031951354536040.html [1/3/11]
26 – forbes.com/2010/12/22/existing-home-sales-markets-economy-realtors.html?boxes=marketschannelnews [12/22/10]
27 – nytimes.com/2010/12/24/business/economy/24econ.html [12/24/10]
28 – businessweek.com/news/2011-01-03/pending-sales-of-u-s-previously-owned-homes-rise.html [1/3/11]
29 – freddiemac.com/pmms/ [1/5/11]
30 – bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=DJIA&close_date=12%2F22%2F00&x=0&y=0 [12/31/10]
30 – bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=COMP&close_date=12%2F22%2F00&x=0&y=0 [12/31/10]
30 – bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=SPX&close_date=12%2F22%2F00&x=0&y=0 [12/31/10]
31 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [1/4/11]
32 – treasurydirect.gov/instit/annceresult/press/preanre/2000/ofm11200.pdf [7/12/00]
33 – montoyaregistry.com/Financial-Market.aspx?financial-market=do-you-have-a-plan-for-your-ira-distributions&category=1 [1/6/11]

The widespread economic shocks engulfing the developed world for the last two years have had far-reaching effects. Some are known and some as yet unknown. But one thing is for certain – interest rates are at historic lows … still. Low interest rates have varying consequences, but perhaps one unintended consequence of our prolonged low-interest rate environment is the unique challenge it has presented to financial advisors and their investors. Due to the low rates, the cost of borrowing for institutions has decreased dramatically, leaving investors with few places to stash any substantial amount of cash and generate anything resembling a decent positive return. So, the question for independent financial advisors becomes, “What to do?”

I would contend that the limited availability of positive yield has created a more challenging environment for financial professionals than many have given it “credit” for (wink, wink). A brief review of historical interest rates provides an indicator of the extremity of our current situation. In late 2001, in an attempt to climb out of the technology bust and the post-911 economic stagnation, the federal funds rate dipped below 2%. To give some context, that was the first time that the fed funds rate had dipped below 2% for almost 40 years! Since that time, the fed funds target rate has dipped below 2% for half of the past decade, with the current target set as low as you can go (0.00%-0.25%).

http://www.moneycafe.com/library/ratecharts/ratecharts2.gif

However you slice it, our foray into prolonged monetary stimulus is really unprecedented, and it’s been a bear for financial advisors and their clients to deal with. Some of the reasons follow.

In theory, lower interest rates fuel lending and corresponding economic growth. Economic growth should in turn fuel stock prices and overall economic expansion. Unfortunately for financial advisors and their clients, the latter has not occurred in a prolonged, sustainable fashion. As a result, client portfolios have suffered from no yield in money markets, low-yielding bonds, flat decade-to-date returns in stocks and collapsing asset bubbles in real estate. Under these challenging circumstances, a financial advisor may have done well by simply limiting losses and managing tax burdens.

Here again, in theory, investors should really measure advisor performance on a relative basis. So, you ask, if all financial advisors and their investors have faced the same macro challenges, than why is it so hard to be a successful financial advisor in this environment? The answer is that nobody likes flat or negative returns, regardless of how well their performance has been on a “relative basis”. It’s simply human nature that investors want to see positive returns. As ridiculous and illogical as it may sound, many investors would be happier with a 6% yield when the average is 8% than they would be with a -2% yield when the average is -10%. After all, a 6% return is at least positive, right? Great financial advisors know that limiting losses is just as important as increasing gains, but it’s just not nearly as fun to talk about limiting losses with your clients. And with no positive yield coming from the cash components of portfolios, negative overall yields are a reality. Unfortunately, this has been the world that financial advisors have been forced to live in on-and-off for almost a decade now.

In earlier decades, conservative clients could get a 5% return in cd’s, perhaps a little more yield in bonds with some limited exposure to stock gains/losses. Now, that positive return component provided by cash/cd’s/money market funds etc., which has been the safety net of financial advice for decades, has basically vanished.

In order to obtain some positive yielding trends for their clients, many financial advisors have turned to direct investments into income-producing hard assets such as real estate, mortgage lending, equipment leasing and energy programs. While we all know that past performance is not necessarily indicative of future results, these types of investments have traditionally provided current income to investors. The yield component of these investments is probably more attractive in the current environment than ever before. Because of the attractiveness of the current yield, it is more important now than ever to consider the make-up of the income and the overall risk/return profile of the particular investment. All things considered, on a relative basis, direct investments that are yielding 5-8% are clearly outperforming many other asset classes in terms of current income.

But not all direct investments share the same risk profile, and it’s important to focus on the sustainability of the distribution/dividend as well as the real potential for capital appreciation. For any investor seeking yield, the long-term sustainability of the distribution should rank very high in an advisor’s asset allocation decisions. Perhaps more importantly, as the current yield rises, it becomes ever more important to ensure that the current and overall return potential are commensurate with the risk being taken. In many cases, the attractiveness of another 1-2% in the area of current yield simply doesn’t justify the additional risk.

For help in identifying the characteristics of risk/return profiles associated with the various products on our platform, please contact the Direct Investments group in the Centaurus Home Office and we can provide you with additional resources to help in your review of our available products. While the initial due diligence of any new product can be painstaking, it’s always worth the effort and, in the end, bolsters your expertise. With a little work, we hope we can help you find some of those elusive positive returns that make for “happy” clients.

Centaurus Financial is an independent broker/dealer, Member SIPC, and a registered investment advisor. If you are choosing a financial advisor, please contact our home office at (714) 456-1790 or send an email to contactus@cfiemail.com. Our home office team will pair you with a top broker or one of the best financial advisors available to meet your needs. More comprehensive information is available at our recruiting website: www.joincfi.com.

Exchange-traded funds are fast becoming a fashionable choice for implementing tax-harvesting strategies whether it be for stocks, mutual funds or other ETFs. The unique structure of ETFs can make them a powerful device with which to execute tax loss strategies. The “wash sale” rule prohibits investors from taking a loss on a stock if a “substantially identical” stock is repurchased within 30 days of the sale. The hazard in merely taking the loss and waiting to repurchase the stock again is that there could be a run-up, and the investor sitting on the sidelines would not partake in those gains. Due to their trading flexibility, fee structure and tax efficiency, ETFs may be an option to explore when discussing tax strategies with your clients.

Stock Replacement

Redeem individual stocks that have incurred losses and substitute sector-specific ETFs to maintain exposure to the related market sector. For example: A loss could be taken on Exxon, Chevron, etc., and the funds allocated into the Energy Select Sector SPDR (XLE), or a loss taken on Bank of America, Citigroup, etc., and the funds allocated into the Financial Select Sector SPDR (XLF).

Mutual Fund Replacement

Redeem mutual fund shares that have incurred losses and install an ETF with corresponding investment objectives.For example: A client holds t he BlackRock Health Sciences (SHSSX) mutual fund and would like to harvest a loss but remain in the medical sector. The client could redeem the mutual fund and replace it with the iShares Dow Jones U.S. Healthcare Providers Index Fund (IHF) ETF.

ETF Replacement

What about harvesting tax losses from one ETF and replacing it with another? This is permissible only if the ETFs are benchmarked to dissimilar indexes. For example: A tax benefit would be acceptable if an investor redeemed their S&P 500 Index Fund (IVV) and replaced it with the iShares Morningstar Large Core Index Fund (JKD).

So when is tax-loss harvesting a sensible strategy? Years in which a customer expects to have a large capital gain event are an obvious choice. Capital losses can also be “banked” and “carried forward” to offset gains in future years. Of course, there are costs involved in such a transaction, so it’s important to avoid excessive trading that could overwhelm the tax savings.

When discussing this strategy with your clients, make sure they are aware it is a strategy to consider, not tax advice. They should consult their tax advisor on how implementing the strategy will affect them before they pursue it. And always, always make sure that the transaction is suitable in light of the client’s investment objectives, time horizon, and risk tolerance.

For additional information please visit the following sources:
http://seekingalpha.com/article/60130-benefits-drawbacks-of-tax-loss-harvesting-with-etfs


http://seekingalpha.com/article/44749-tax-loss-harvesting-the-wash-sale-rule


http://www.investmentadvisor.com/Issues/2004/July%202004/Pages/Harvesting-Those-Losses.aspx

By understanding these strategies, an independent broker can become a valued advisor and stay in touch when investing times are tough. Successful independent broker dealers often have turnkey planning ideas and materials that advisors can utilize for reaching out to their customers. Centaurus Financial provides a library of ideas that are available to Centaurus Financial independent financial advisors just for this purpose. At our wealth management firm, we strive to support financial advisors in their marketing endeavors by ensuring that they aren’t “re-inventing the wheel” every time they market, and instead are able to focus on what really matters – working with their clients and building relationships.


Centaurus Financial is an independent broker dealer, Member SIPC, and a registered investment advisor. If you are choosing a financial advisor, please contact our home office at (714) 456-1790 or send an email to contactus@cfiemail.com. Our home office team will pair you with a top broker or one of the best financial advisors available to meet your needs. More comprehensive information is available at our official website: www.centaurusfinancial.com.

Many financial advisors dread giving presentations, especially to large groups, for reasons such as stage fright or looking foolish. Getting over stage fright can be as simple as picturing the audience naked, but looking foolish can be a more challenging obstacle to overcome. Giving a poor presentation usually means that the speaker didn’t know what they were presenting or they couldn’t keep the audience’s attention. It is important for speakers to engage the audience’s attention from the start and to hold their attention throughout the presentation. Centaurus Financial advisors understand that speaking to groups is the most efficient and effective way to deliver an important message and deliver valuable financial knowledge. The following six strategies can be utilized in order to keep an audience engaged:

Relate: Holding your audience’s attention will require a bit of homework as it is imperative that you can relate your subject matter to your audience’s needs and values. An example would be that you can probably expect failure by presenting “How to Have Fun Taking Risks” to a group of actuaries, so adapt to the individual needs, desires, and demographics of the group.

Anticipate: Try to put yourself in the client’s shoes and anticipate some of the questions they might ask. By preparing ahead of time, you will be able to develop the finer points of topics that may come up during questions.

Ask or pause: Most professional speakers recommend that you occasionally pause and ask for questions and opinions.

Visual aids: A presentation can be enhanced by employing visual aids to illustrate your main points and ideas. Visuals are another way to hit your audience’s senses to keep them captivated and connected to the presentation. Many people are visual thinkers, so visual aids can be an important component of your message. Images also aid memory.

Use clear and vivid language: Presenters must also adapt their vocabulary to the audience. Attendees may become frustrated or confused and begin to lose interest if a presenter uses lingo they don’t understand. Use compelling language that fits the audience’s frame of reference and relates to their everyday experiences.

Explain: It is important to explain the relationship between your subject and familiar ideas. Your audience needs you to take abstract ideas and apply them to examples that they care about. Your key points should be illustrated by circumstances that are familiar to them.

By following these six strategies, a financial advisor can become a captivating speaker by engaging the audience right away and holding their attention until the end. Successful independent broker dealers often have turnkey presentations and materials that advisors can utilize for presenting to their clients and prospects. Centaurus Financial provides a library of presentations which are available to Centaurus Financial independent financial advisors just for this purpose. At centaurus Financial, we strive to support financial advisors in their marketing endeavors by ensuring that they aren’t “re-inventing the wheel” every time they market, and instead are able to focus on what really matters – working with their clients and building relationships.

It’s no secret that social media websites, defined as sites that are based on user participation and user-generated content (Facebook, Twitter, LinkedIn, YouTube, etc.) have exploded in popularity. Recent research shows that, “two-thirds of the world’s Internet population visit a social network or blogging site and the sector now accounts for almost 10% of all internet time.” Those are staggering numbers and businesses are trying to capitalize on this form of communication to increase sales. 1. The Nielsen Company; Global Faces and Networked Places—A Nielsen Report on Social Networking’s New Global Footprint

Unfortunately for Registered Representatives, our industry has a unique set of rules that complicate Social Media Usage by Registered Representatives. FINRA recently released new guidance on the use of blogs and social networking sites promoting securities business. This notice is in response to pressure from the district committees and recognition that these specialized websites are becoming ubiquitous. This guidance was needed because applying existing FINRA and SEC rules to these new media has proven complex. To illustrate this point, one needs only to look at the first page of FINRA Regulatory Notice 10-06, which references 18 different rules affecting the use of social networking sites promoting securities business.

The good news is that because of this new guidance, Centaurus Financial will be able to allow its Reps to use social media for advertising and networking purposes; the bad news is that the rules remain somewhat prohibitive (and they are already being misinterpreted by some). In an article on January 29, 2010 , a columnist for Financial Planning magazine stated, “The FINRA guidelines say that dynamic content such as Tweets (the name for Twitter posts), along with posts on Facebook walls and LinkedIn discussion boards, do not need to be pre-approved by a compliance officer or broker-dealer—a level of leniency that shocked some social media gurus.” This sounds great; unfortunately it is erroneous. “Tweets” would actually be considered an advertisement, sort of a “mini-blog,” not what this article calls “dynamic content.” As such, they must be pre-approved by the compliance department (more on this below).

So what are the guidelines for Social Media Usage by Registered Representatives and how can these sites be used appropriately? First of all, to effectively use social media sites, you need to start by understanding the rules. The best marketing idea in the world can’t be implemented if it runs afoul of regulations.

The best way to understand advertising through social media sites is to remember a few simple rules of thumb (see below) and if you encounter a situation that doesn’t clearly fit into these simple rules, contact the compliance department before proceeding.

Social Media Usage by Registered Representatives Rule of Thumb #1: You should consider anything you wish to communicate through such sites to be an advertisement. As such, written approval by the compliance department of the specific communication must be obtained prior to posting it to a social media site. This includes Twitter’s “tweets”. Following this procedure will satisfy both the advertising requirements and our records retention requirements (records retention is another serious challenge for social media site content). 2. Schultz, Stacey; In the Game: New Rules for Social Media; Financial Planning Magazine;

Social Media Usage by Registered Representatives Rule of Thumb #2: NEVER make recommendations through social media sites. NEVER. Doing so would trigger a “suitability” obligation for every pair of eyes that sees the recommendation. This is one of the reasons all communications must be submitted to compliance prior to posting on any public site. The compliance department will make sure you’re not crossing the line from advertisement into “recommendation.” If you are unclear about the distinction, talk to the compliance department BEFORE posting.

Social Media Usage by Registered Representatives Rule of Thumb #3: NEVER mention a specific product or link to a site recommending or discussing a specific product. Doing so could constitute a recommendation and may also violate other FINRA rules. Remember that the purpose of these sites is not to “sell,” it is to generate interest. Save any mention of specific products for a face-to-face meeting—a time when you can actually determine appropriate recommendations. Don’t try to “sell” using a social media site.

Social Media Usage by Registered Representatives Rule of Thumb #4: If you can’t submit a communication to compliance prior to use, then stay away from that type of communication. This would include participation in “chat rooms” or other interactive forums. FINRA considers interactive, real-time communication to be a public appearance, not advertising, but there is no practicable method for supervising such appearances and for meeting the books and records requirements that FINRA does require. Therefore, if you can’t submit it prior to use, steer clear.

Social Media Usage by Registered Representatives Rule of Thumb #5: Only provide links to your own approved website, Centaurus Financial’s website, and FINRA’s website. Do not provide links through social media sites to other websites.

Social Media Usage by Registered Representatives Rule of Thumb #6: Be careful about what gets posted by others to your social media pages. FINRA does not expect you to be responsible for items posted by others, but if you comment on it, you may become responsible for it. Also, you must be certain not to have others post on your pages something you’ve helped to create. You would be responsible for such items.

Social Media Usage by Registered Representatives Rule of Thumb #7: Finally, one thing you should do is come up with a strategy and work with us to implement it. An effective strategy for social networking sites promoting securities business would be to create a consistent message, get it approved in advance, and then distribute the same message through as many social media outlets [and as often] as possible. Each outlet must be noted on the approval, but that is simple.

If you’re serious about implementing an effective strategy, you should consider hiring a search engine optimization (SEO) firm. They can assist you tremendously in crafting a social media marketing strategy.

If you are choosing a financial advisor, please contact our home office at (714) 456-1790 or send an email to contactus@cfiemail.com. Our home office team will pair you with a top broker or one of the best financial advisors available to meet your needs. In addition, Centaurus Financial’s official website with more comprehensive information relating to many aspects of the company is located at www.centaurusfinancial.com.

Centaurus Financial Independent Financial Advisors – CRM Basics

As a trusted, independent broker, you are paid to know your client and know them well.  For Centaurus Financial Independent Financial Advisors, one of the tools used to achieve this is a Client Relationship Management [CRM] system.  There are several features that are typically included with a CRM product.  These features include:  

• Anywhere access (web-based solutions)
• Document vault
• Activity archive
• Update and customize client contact information
• Segregate client records into “A”, “B”, “C” and “D”
• Household families
• Reminders
• Reporting
• Campaign management
• Lead and Opportunity management
• Integration with other Applications (You don’t want to enter data twice!)

These CRM features have been demonstrated to help registered advisors achieve the following:
• Streamlined sales and increased productivity
• Increased cross-selling opportunities
• Improved client servicing
• Increased client loyalty
• Better profiling and campaign execution
• Expense reduction
• Increased profitability

Within the securities and wealth management industries, the following products are considered to be among the top CRM tools used by financial professionals:
• Redtail
• Smartoffice
• Smarsh
• Salesforce
• Junxure

This is just a sample of how Centaurus Financial, as an independent broker dealer, will provide you the information to help you understand the importance of CRM to improve your customer service while increasing your profitability.  Managing technology can be a serious challenge to any small business owner, which is why Centaurus Financial has trained personnel dedicated to helping you improve your business, better relate with your customers and ultimately benefit the performance of your business and your client’s portfolios.

As a trusted independent financial advisor, your computer’s security is paramount in protecting client information.  For Centaurus Financial Independent Financial Advisors, there are three basic areas to address in securing the computers you use to access your client information and services.  As a member of the financial services community, Centaurus felt that the following guidelines would be helpful for public consumption.  In addition, the following guidelines may be helpful in designing systems to help protect your data.  When designing your security system, the following processes may be helpful:
1) Windows Account Login
a) You should not be able to use your computer without entering a password.  Additionally, you should set strong passwords that are 8 to 16 characters in length and contain a combination of upper case letters, lower case letters, numbers and special characters.
b) Setup separate user accounts for each person using the computer.
c) Passwords should not be shared.
d) You should change passwords at least every 90 days or upon an employee’s or associate’s termination.
e) Do not store passwords in plain sight.  Lock them up!
f) Screen Savers should be activated and set to “On resume, password protect.”
2) Anti-Virus Software (Including Malware, Spyware, Adware, Keystroke Loggers)
a) You should have up to date Anti-Virus (AV) software installed on every computer you use.
b) The AV software should have its definition file set to update automatically.  Your computer will need to be connected to the Internet for this to work.  If a computer has not been turned on or has not connected to the Internet for an extended period of time, connect it to the Internet when first starting up and let the AV software update itself prior to checking email or surfing the web.
c) Make sure all of the AV features relating to Malware, Spyware, and Adware are enabled automatically.
d) Some of the more popular and appropriate AV software products include:
• Avast
• AVG
• VIPRE
• BitDefender 2010
• Macafee
• Norton/Symantec
• TrendMicro
• WebRoot
3) Windows Updates
a) Set all computers to receive and install windows updates automatically.  http://windowsupdate.microsoft.com
b) If a computer has not been turned on or has not connected to the Internet for an extended period of time, connect it to the Internet when first starting up and run “Windows Update” prior to checking email or surfing the web.
c) When shutting down your computer, you may see the option to “Install Updates and Shut Down”. Choose this option and wait for it to finish its update and turn itself off before shutting down your computer. 

This is just a small sample of the consultative services Centaurus Financial can provide independent financial advisors as they struggle to keep up with ever-changing technological challenges, regulatory developments and most importantly to ensure client information security and trust.

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