What the Rising Dollar Means to You

Over the past year the U.S. dollar has had a remarkable recovery.

A strong dollar does have some advantages:

    • When the dollar goes up things bought with it become cheaper – one reason that oil, gas and gasoline prices are plunging.

    • With oil and gas prices down the average person has more money to spend on clothes, boats and big screen TVs.

If the dollar rises too quickly it will create head winds for the U.S economy and corporations. True, the U.S. economy is just bumbling along but it is stronger than Europe that is still flat on its back.

The strong dollar does have disadvantages:

    • American exports are more expensive.

    • Companies in the S&P 500 get about 33% of their sales from overseas and those sales are worth less when converted back to dollars. Hence, profits will drop leading to a falling stock market.

    • U.S. priced products become more expensive against imports. Thus, Ford and GM products would be at a disadvantage to those made by Toyota.

    • U.S. companies may have to cut prices overseas to be competitive thus making profits lower and further hurting the stock market.

So many people complained about the weak dollar. They all wanted a super strong dollar but did not realize how it hurts competition and the stock market.

The Market is Still Not Back to Even

The 2000 “tech wreck” and the 2008 “financial crisis” each created losses of 40% to 50%. We all know that a 50% drop in value requires a 100% gain to get back even.

The media will tell you that the markets have more than made up for their losses, but, they have left something important out. Let me phrase it this way. If in 2000 you were earning $100,000 per year and due to the tech wreck you lost your job and in order to survive you had to work part time at $50,000 per year. Then in 2007 the old company hired you back at $100,000. Unfortunately, in 2008 you lost your job again and again worked part time at $50,000 per year. Finally, in 2014 your old boss called you back at $100,000 per year. In general, you are back to “even”. Yet the first thing you would say is, but Paul, I have lost ground due to inflation. My present $100,000 per year is not worth the same as the $100,000 per year in 2000. (Correct, now what great parting gifts do we have for your great answer? :) )

Well the same holds true for the stock market. On 3/24/2000 the S&P 500 hit 1527.46. This is known as “nominal” level.

Using just the “core” inflation rate (which does not include housing, food or gasoline costs – how foolish) the 2000 value of 1527.46 on the S&P would have to be 2124.70 today. As of this writing the S&P is below 2000. So the “average” investor, after 14 years is not back to even. (Yikes!)

There are far better alternatives to the above scenario that allow you to link yourself to the market yet not be in the market. All of our clients that had say $100,000 in the year 2000 now have over $263,000 in their accounts. So they are far better off on an inflation adjusted basis.

Are you hedged and prepared for the next correction? Or, would you like to learn how to protect fully against any losses?

Have You Hedged Your Portfolio?

Definition of a “hedge”: An investment position intended to offset potential losses/gains that may be incurred by a companion investment.

As of mid September 2014 the bull market that began on March 9, 2009 is over 2020 calendar days old. It is the fourth longest in modern history and the fourth biggest rise at almost 200% (unfortunately, on inflation adjusted basis the average investor has not yet recouped their losses).

You may be surprised to know that the S&P 500 is down about 7.2% from its 52 week high. Thus, the average movement of all 500 issues from their highs is actually negative. How could this be possible with index at record highs?:

    • The index is capitalization weighted and influenced heavily by the largest stocks.
    • The largest stocks are out performing the smaller ones which creates divergence.
    • The energy sector went from the second best performer in the first half of 2014, up 13%, it is now the worst in the second half, so far, down 6.5%.
    • Earlier in the year small cap biotech and social media underperformed, now the reverse is happening.
    • Outside the S&P 500 many stocks are in a correction or bear market territory (down 10% to 20% respectively).
    • One third of all stocks in the Russell 2000 small cap index are down 10% or more.
    • The fact that the S&P 500 index is hitting new highs when the average stock is down is saying that there are fewer stocks leading the charge. “The generals are advancing while the troops are retreating.”
    • Market breadth leadership is narrowing and not a good sign, but does not mean the markets will collapse tomorrow.

The question you must ask yourself is… can you financially and emotionally handle a 25% – 40% correction? If the answer is no then you should hedge your position. How?

    • You could sell everything and put it into cash (not good if the markets continue to rise).
    • Sell off a portion of your gain at each market increase of say 5% to 10% (similar to taking some of your winnings off the table in Las Vegas).
    • Buy “puts” against your stocks or ETFs.
    • Transfer monies into alternative investments that rise when the markets do, but, never experience a loss.

These are just a few ideas. After the market crashes in 2000 and 2008 I heard people say… “I wish I had not been so greedy and taken my profits before losing so much.”

History always repeats itself so maybe it is time to “hedge”.

Beneficiary Designation Exasperation

The husband and wife were reviewing her annuity with their financial advisor. “You need to designate a beneficiary,” says the advisor. “I thought she did,” the husband responds. “I’ll send you a beneficiary designation form and help you submit,” the advisor concludes, and moves on to the next topic.

Later, the husband pulls the annuity contract. It includes the wife’s application, complete with her beneficiary designation. The employee who processed the original application is still on the job, years later. She reviewed the file, and explains that she messed up and had looked at the wrong paperwork when logging the contract. The company had the right paperwork, but didn’t look for it until challenged.

Beneficiary designations matter, and everyone should keep a copy with their Will. Better yet, insist on a written confirmation, to prove your designation was accepted and recorded and matches the instructions you provided. Data entry and record retention are the weak links in beneficiary designation, and they fail too often.

Does anyone remember Washington Mutual? The FDIC bought all of their assets, then sold them to Chase. Did Chase get any account agreements? No, all the assets and records were reduced to electronic notation and more than one family found itself in probate litigation because the records were lost.

Electronic notations are not written instruments. If you expect your beneficiary designation to be honored, leave a written copy.

Double check the designation that’s actually recorded. If you designate a trustee, but confirmation says “my estate,” the asset is going through probate. Don’t assume the professionals know what they’re doing. IRAs are long-term investments, yet some custodians destroy the paperwork after three years. If you don’t leave a written copy, your family’s not getting one from the custodian.

It’s all so haphazard. Why not just let everything run through probate? Think again. If you don’t designate a beneficiary, the account may designate one for you. Especially for employment benefits, where efficient administration is the highest priority, it’s common that the plan defines default beneficiaries. Thought that account was going to probate? Your family may discover it’s going to the kids in equal shares, including the one you disinherited.

Disability Payments For Those That Are Not Disabled

The present administration continue to advocate taking from the “haves” and giving to the “have-nots”. Over the past 6 years the labor participation rate (the number of people working full time divided by the number of people available to work) dropped from 95% in the 1970’s to around 88% today. This is the lowest in U.S. history.

At the same time unemployment benefits were extended six years ago from 26 weeks up to 99 weeks now. Basically, there are not any incentives to go to work if one is being paid for 2 years to do nothing. As these 99 weeks of benefits ended the present administration lowered the requirements to receive lifetime “disability” payments.

Presently, the average monthly disability payment to an individual seems to be about the same as the monthly full-time minimum wage. Hence, the 40 hour work week is competing against the zero (0) hour work week for the same pay.

In addition, a person deemed “disabled” can qualify for FREE health insurance, food stamps, public housing, transportation services, free education and student loan forgiveness. It should not take anyone too long to figure out why so many people are applying for and receiving disability benefits.

True, there are people in our society that are truly disabled and need and deserve our help. But, these “freeloaders” are going to ruin it for those that really need the help.

Contact your representatives and let them know how you feel.