The stock market experienced a panic attack today. But please avoid confusing the market’s gyrations with what’s actually going on in the real economy.

Stocks are overreacting to the unfortunate confluence of events: the downgrade of U.S. government bonds, some weaker than expected economic data, and the troublesome but manageable U.S. fiscal position. Along with sovereign debt issues threatening Europe, these factors turned market sentiment ugly.

Former Federal Reserve Board Chairman Alan Greenspan put it this way last Sunday on Meet The Press: “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.” Greenspan, who is not an oracle but who does have years of experience in running the nation’s central bank, added that the downgrade “hit the self-esteem of the United States, the psyche.”

While such a blow to our nation’s financial reputation cannot be dismissed and must be addressed, it’s also important to remember that there has been no real change in fundamentals driving the economy.

Improving economic data is plentiful. “The leading indicators point to slowly expanding economic activity in the coming months, according to the Conference Board’s most recent appraisal of the economy.

Weekly unemployment claims have tumbled from the April 2009 peak. The Bureau of Labor Statistics reported modest improvement in job growth for July. Layoffs of government workers have masked a jobs rebound in the private sector that looks fairly typical at this stage of an economic recovery. Economists cite renewed July-August auto hiring and a slower pace of state and local government layoffs ahead as reasons for optimism on initial claims for unemployment benefits.

Corporate earnings estimates keep climbing. Q2 nominal Gross Domestic Product is up 3.7%, while Q2 revenues on Standard & Poor’s 500-companies were up a whopping 13.2%!

Earnings estimates for 2011 and 2012 rose again last week, continuing a trend of upward estimate revisions.

The S&P 500 is trading at 11 times 2011 earnings estimates. Investors right now can choose to buy the 10-year Treasury bond with a 2.3% yield or get a 2.2% dividend yield on the S&P 500 plus the potential upside on stocks. Will the relative value of stocks versus the 10-year Treasury Bond ultimately be recognized by investors? History may not repeat itself. It’s possible. But using historical valuations and economic fundamentals to guide long-term investment decisions is prudent.

Hysteria is not new to investment markets. While it not easy to ignore the gyrations, our advice is to resist the panic by staying focused on fundamental factors that drive long-term values in securities markets.

If you need to speak with us, we’re here for you.

Dear Client,

At Monday’s market close the Dow Jones lost more than 6.5% in value. This was not  a result of the S&P downgrade of US issued debt. US treasuries were actually the safe haven of the day, pushing the US Bond Aggregate index up .5%. Today’s sell off in stock was an emotional response to what is happening in Europe and a potential recession globally and here in the US.

Stronger European nations such as Germany, France and the Netherlands are showing signs of an economic slowdown. In addition to weaker economic indications these same countries also hold Greek, Irish, Portuguese and Spanish debt. Greece recently received a second bailout, only to now need a third in order to pay its bills. Last week Italy took the spotlight in that it is rapidly approaching a situation where it will not be able to meet its debts obligations. This situation is slightly different in that many believe that Italy is too large for the European Central Bank (ECB) to completely bail out. Italy’s Government is playing down its financial situation stating that their banks are well funded and that its citizens as a whole save well. This is not reflected in their 10 year treasury bonds, which yield 6%. Comparatively the currently healthy German 10 year treasury yields 3%.  A 10 year US treasury yields 2.6% and a two year note yields 0.336%.

Last Friday the ECB announced that it would begin purchasing Italian and Spanish debt, helping the countries raise additional capital. This is very similar to what the US did here in 2010 when the Fed purchased long term US Treasury Bonds from the bond market. The US stock market has sold off simply because of the uncertainty of the situation. The last large scale treasury bond default we saw was in 1998 when the Soviet Union defaulted on its bonds. The markets worldwide traded down then recovered a few weeks later.

The United States of America no longer has a long term AAA bond rating. What does this mean? Economically in the short term this rating really means nothing, in fact other rating agency’s still maintain US debt at AAA. This was proven on Monday as even after the first trading day after the downgrade the 10 year US Bond traded up in value as investors flocked to safety. In the long term this means that our country must stop the overspending. The S&P said in their report “Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden.”

The Wiser Portfolio’s are built to be held long term. Short-term market volatility is certainly mentally draining.  No one likes to lose, especially money, even if it is just on paper. In times such as these, investor behavior is more important that asset allocation.  Diversification and overall portfolio risk are important, but at this point your portfolio should already be built based on these objectives. Selling and going to cash emotionally feels like the right thing to do, but history shows that this is absolutely the wrong approach. In the chart below we see the market with a bar chart overlay of fund inflows and outflows. You can see as the market peeked in 2007 investors were adding large amounts of new money to the stock market.  In 2009 as the market bottomed out, investors were selling large amounts out of the stock market. This buy high sell low approach is not a winning solution for investing. To make matters worse these investors were selling bonds at their lows to buy stock at their highs in 2007 and then selling stocks at their lows to buy bonds at their highs in 2009. Buy and hold investors will have a long-term higher rate of return, especially when building portfolio’s using index funds.

Over the next few weeks’ European governments will be forced to make tough economic decisions. As these decisions are made the market will become more stable and economic valuations easier to determine.

Assuming that your portfolio is built for your long-term objective, your best action is to ignore the emotional market and do nothing. If you have any changes to your personal financial situation give us a call so that we can reevaluate your personal investment strategy.

Casey T Smith, President, Wiser Wealth Management, Inc

The last few days have been very volatile ones for the global stock markets. The headlines of a Greek debt default and the US August 2 debt limit increase deadline are contributing to the uncertainty in the market.  Over the last few days we have taken several calls from investors concerned about these debt issues and what actions we are taking in the portfolios to counteract these events.

It is important to understand that the Greek and US debt issues are not the same. Greece can not generate enough revenues to cover their interest payments nor can they raise the funds needed through the bond market. In the US we are facing a technical default, meaning that we can very easily offer US Government bonds to the market and sell them at relatively low interest rates but the self imposed debt limit is preventing new offerings without expiring existing ones. The August 2nd deadline has become political in that both sides of the debate want to cut spending but have different view points in how to do this. The US may miss a debt payment that could cause short term pain but this does not mean that the US will default as a nation on all its obligations forever.

US Government bonds are the safe haven for investors world wide. If a US technical default were to happen, where would the world go to invest safe money? Recently we have seen gold, FDIC insured accounts and German bonds as alternatives to US Treasuries. It should be noted, though, that amongst this uncertainty we have seen long term US Government bonds decline in value faster than shorter duration US Government bonds. This seems to show that despite a technical default looming, by its investment behavior, the world continues to regard shorter duration US Treasuries as a safe haven. This certainly is not what you hear about on the nightly news.

Here at Wiser we build portfolios for the long term. Two years ago we shortened the duration of our bond allocations to reduce risk. We also added international treasuries in foreign currency to  help cushion the falling dollar’s effect on the portfolios. We know from long term data that market timing is a loosing game. We know that gold does not pay us anything to hold it and FDIC insured accounts pay very little. As investors we do not want to react to emotion or feeling but rather trust that quality investments will prevail over time. This is how we survived the financial crisis and exactly how we will address this current situation.

Looking at current events, we believe that there is a greater risk in not cutting long-term spending than meeting the August 2 deadline. This does not mean that missing the deadline will be a non-event but that any pain caused will be short in duration. Long term we believe that the dollar will continue to decline, interest rates will remain low and we could see another stimulus plan put into place to push along our slowing economy. With this view we are looking at adding to asset classes such as commodities and other alternative investments that have a low correlation with the stock market. We will continue to search for long term healthy asset classes and look for opportunities to lower your overall cost of investing. Our focus will always be long term.

Thank you for your trust and business.

However, I do want to share with you the blog of an Egyptian-born pastor here in Atlanta. Dr. Michael Youssef is the pastor of the Church of the Apostles (www.apostles.org). He is also the lead voice of Leading The Way, a worldwide outreach ministry also based here in Atlanta. Many of the news anchors that you are listening to, as well as key US government officials, do not understand the root cause of the Egyptian protests.

Here is an excerpt of Dr. Youssef’s recent blog on Eqypt:

“Westerners are looking at what is happening on the Egyptian streets and wondering if it is good for an oppressed people to protest against a semi-dictatorial regime. Most of these young protesters cannot find jobs, and inflation has ravaged the middle class, to say nothing of the gulf between the very rich and the very poor.

On the surface, this is an understandable situation. But before you judge the motives of the protesters, you must know who is really behind those young people on the streets.” Click HERE to read his full blog.

In another blog, Dr. Youssef writes about America’s Role in this crisis:

“The problem with freedom and democracy in the Muslim world is that it is a figment of the imagination that only exists in the minds of Condoleezza Rice and Hillary Clinton.” Click HERE for his full blog.

Dr. Youssef on CNN Television

Youssef on CNN

So What Happens

Bad investments happen when investors buy investments high and then sell investments low.  This seems like a simple, common sense and easy to follow rule, but each time extraordinary events happen in the stock market and the rule is broken, people will ultimately say, “This time it’s different.”  John Templeton, a mutual fund pioneer and asset manager, had this to say, “The most dangerous words in investing are ‘This time is different.’”

As the chart shows, when stocks are historically at their cheapest, investors sell stocks and buy bonds.  When stocks are at high prices historically, investors buy stocks and sell bonds.

Going Forward

Going forward into the unknown, investors will make money by having a wise investment strategy and sticking to it.  Good investment strategies may still have time periods where performance lags in times of crisis.  For example, during the rise of the tech bubble at the end of the 90s, a good investment strategy lagged the performance of tech stocks people were using to get rich.  However, the good investment strategy didn’t crash like many of the tech stocks.

Before getting into downfalls of the market, it’s worth pointing out that corporate earnings in the first quarter have shown that consumers and businesses are once again willing to buy and invest. A very broad example of this can be seen in the hardware sector. Apple’s stock price is up more than 7% due to strong iPad and iPhone sales. This has also benefited Sandisk, a supplier of flash memory for mobile devices.  The company returned 21% in the quarter.

There is still an elevated unemployment rate, and job growth may be slow or delayed for months or even years in the future. The uncertainty among the American population regarding their job security and employment prospects makes it difficult to stabilize the housing market and boost consumer spending. Recent housing data has shown that even though mortgage rates are at record lows, the demand remains significantly down. Of course, it’s just common sense that people unsure of future cash flows will hold off on purchases that require a large monthly obligation, so investors are left skeptical of the housing market’s ability to recover fully after the expiration of the housing tax credit.

In the Manufacturing Sector, energy companies have been harmed by falling oil prices, the drilling moratorium, and fear over increased regulation in the wake of the Gulf oil spill. The anxiety over increased regulation seems to be a common denominator across the market, as there has been a weak performance of the financial sector as well. This is due to Washington and Wall Street turning their attention to financial reform. With this news of government intervention, bank and financial stocks were sold off as investors feared the impact of reform.

Large-cap companies have also been subject to substantial headline risk in 2010 as well. When the public focuses on large companies like banks, oil companies, and healthcare, Congress does so as well. These negative headlines not only affect investor sentiment, but can also affect the company’s underlying business. A general idea of the impact of the financial reform bill being passed should become clear in the upcoming month, as the financial sector gains a little more clarity on what it faces in terms of new regulations and compliance.

Excessive government debt is another uncertainty that has been at the forefront throughout 2010. The flight from the troubled European debt of Portugal, Italy, Ireland, Greece and Spain has led to a historic rally in the U.S. treasuries. The U.S. dollar, like in the past, has been seen as a safe haven to invest in despite growing borrowing needs and fundamentals that might suggest a rise in interest rates. The Federal Reserve, though, has committed to keep interest rates low for the foreseeable future. Although the U.S. still holds AAA status and should be in no immediate danger of a downgrade, the mounting debt issue with the US government will come under pressure unless measures are taken to reduce the record budget deficit, according to Moody’s Investor Service.

Granted, uncertainly will always be a factor in the market. Accurately predicting the future in the midst of reform, regulation, unstable governments, and future debt obligations is an extremely difficult proposition. In these times of negative feelings and general uncertainty, though, we can be certain that the different sectors will react negatively as they have this past quarter. In subsequent quarters, many of these unknowns will begin to come to light and the uncertainty driving the market currently will be clearer to investors.

By Paige Slusser

This public debt isn’t anything new for our economy; it’s a part of our history. The only time when the U.S. was actually debt free was during Andrew Jackson’s presidency, when he ordered it to all be repaid. Today, our national debt remains at around 53% of our GDP. Compared to Japan’s public debt to GDP of 192%, the US doesn’t look quite as bad. Still, debt is borrowed and has to be paid back eventually. The Federal Reserve could crank up their printing press and increase inflation to pay it all back, or default on government bonds. Neither of these situations are likely, but since the Federal Reserve has done the ‘print more money’ trick before, it’s not improbable to think that something drastic couldn’t be considered.

Below is a comparison of the immense Federal Government deficit to American household debt. If public debt is increasing, it should follow that private debt is on the same path. When plotted on a simple graph, it is true and highly positively correlated at 97%:

Of course, just because two figures are highly correlated, there is not necessarily a cause and effect relationship. When public debt increases, it doesn’t cause private debt to increase. There are numerous other factors that play a role. That being said, seeing the exponential explosion of debt and the relationship between the two figures on a graph can help put things in perspective and lends a little credence to the theory that overall, Americans are becoming desensitized to debt.

With the economic recession and high unemployment levels, it isn’t surprising that household debt has increased. Cardweb.com, a credit industry reporting website, states that American households with at least one credit card owe more than $8,000 in debt. However, this number has been found to be skewed by a portion of the population with a vast amount of debt. After analyzing the credit card debt of those surveyed, Bill Whitt at the VIP Forum, a Washington D.C. research firm, found that only 29% of households owe $1,000 or more on their cards. Although almost 75% of Americans owe less than $1,000 on their credit card bills, the effect on the economy can be huge. The collapse of the mortgage market is an easy illustration of how the default of a small portion of loans can have a tremendous effect on the economy.

How can you safely leverage yourself against the perils of debt? Unlike the Federal Deficit, there are ways to tangibly protect you and your family from debt and potential bankruptcy in your own home. One of the first and probably hardest lessons to learn is to not let your eyes be bigger than your wallet. Simply speaking, don’t buy things you can’t afford – especially if its monthly payments will max out your budget. Small amounts of debt over time will end up accumulating and eating away at your savings. Another couple of steps to take are in the world of credit cards. The best way to maintain good credit is by paying your balances in full and on time. If you are unable to keep track of your different balances, then you many want to consolidate into one or two cards.

There is no simple “cookie-cutter” answer on personal debt that would suffice for every personal situation. The best advice is common sense. Be fully aware of the combination of your personal credit balances (bills, loans, and mortgages), disposable income and spending habits. From there, set a budget and adjust to your own wants and needs. You may find that you’re spending more than you’re making and need to cut back in a certain area, or that you should go ahead and pay off a high interest bill while maintaining the minimum payment on others. You may even find that you are able to save for retirement or other endeavors.

If the general population becomes more aware and averse to debt while they are still able to recoup, maybe the government will learn a lesson from its people – to cut out unnecessary spending and manage current resources wisely.

By Paige Slusser

The bill ventures into some areas that legislation has previously left alone. In many ways, the financial system needs some changes. However, for the most part, the Independence Day bill is more confusing than freedom-promoting.

Business Models

You may have guessed it, but banks will be receiving many new regulations. Economists believe that the increased costs to employ these new regulations will increase the cost of credit to the individual and small business, will drive out smaller banks from the market and exclude many of those who are less creditworthy from receiving credit. Those costs could be acceptable if the bill is effective, but it is largely unclear as to whether it will be. The Senate is somewhat split over the bill as a solution to these issues.

The financial industry landscape is a diverse one, ranging from financial advisors serving individual clients, hedge funds serving unique wealthy investors, and interest groups, venture capitalists and broker-dealers creating the transactions on the stock exchanges. Also to consider are the myriad of other functions and business models like investment banks, market makers and mutual fund-type companies functioning in a wide range of capacities to help the financial sector run.

It seems that some of these business models will have to endure higher taxes and higher audit and regulation fees where there was previously only some oversight.

The Individual

One area where this bill truly gets it right is looking at the standard of care given to the individual investor. After all, isn’t that what it should be all about? The entire bill came into existence so that America and Americans would avoid another major financial collapse and to plug the holes up in the system.

Currently, depending on whom the individual investor goes to for portfolio management, they could have an advisor who is compensated from the products them sell, and is regulated by how the advisor sells them. For example, a broker must only sell a product (like a mutual fund or annuity) to someone who is suitable for the product. There are many philosophies on what this means, but basically it comes down to the question of if a reasonable person would invest with this product.  If the answer is yes, then the investor is considered suitable.

In contrast to the above situation, an individual investor may go to an advisor regulated not by what they sell, but by the advice they give. As such, these advisors are unable to receive any kickbacks from the service they provide. They must give the client their best advice, and act in the best interest of that person. This role is similar to a defense attorney and it is called fiduciary. Registered Investment Advisors have a fiduciary standard of care to clients. Brokers have a suitability standard of care to clients.

Currently, brokers are not required by law to give their best advice. Registered Investment Advisors are.

Why is this an issue?

In 1855, William Travers, a New York businessman, was in Rhode Island and saw a long line of yachts and was informed stockbrokers owned them all.  This led him to ask his famous question, “Where are all their clients’ yachts?”

We have created an industry and a culture inside the stockbroker industry of double-mindedness when serving clients in how the advisor is compensated.

New words like fee-only have come up to express the way Registered Investment Advisors are paid, by a plain, transparent fee, only. They cannot accept payment from mutual funds for selling the product and receive no benefit from not giving the best advice possible.

Last year, in the early talks of the Financial Reform Bill, the problem was raised that people just cannot tell the difference between fiduciary advisors or Registered Investment Advisors and Brokers. Both had a similar “Advisor” type title and from research,  it was determined that these people are all perceived the same by investors.

In The Bill

The bill appears to give the SEC the ability to begin to regulate brokerages in a much stricter way and would allow them to be brought under the fiduciary standard.  Small advisories under $100 million in assets would be regulated by each state. This would greatly increase the level of protection individual clients would receive, as the SEC, who currently regulates those size firms, does not properly look at firms that small in size.

Reform seems to be coming this 4^th of July and though not giving investors more freedom, some protection seems to be on its way, slowly.  Investors do have options available to get fee-only advice, where kickbacks and product sales do not exist, but they will have to know what they are looking for:  an independent, fee-only, Registered Investment Advisor.

This is, of course, just an economic theory. What does it mean for you and your investment strategies? While this certainly isn’t true 100 percent of the time, in today’s world of instant information, it is fairly difficult for the average investor to find an undervalued stock, or a specific stock to successfully short. For example, if a newspaper or a magazine suggests that readers buy a certain company now, it is likely that the readers are too late to capitalize on the investment. Maybe the publication’s sources tell them that the stock is undervalued, or that the price will double because of X, Y and Z. By the time the information, already ancient just a few short hours later, is in the investors’ hands, the stock should already have this information incorporated in the current price. The information could have even changed entirely.

Granted, there are anomalies. Consider Enron for example. Bethany Mclean, columnist for Fortune Magazine, looked at Enron’s financial reports and discovered that they were overpriced at their peak. Mclean questioned Enron’s inflated stock price and wrote an article in Fortune entitled, “Is Enron Overpriced?”. If she, or anyone for that matter, had continued to look into the unclear revenues the books showed, they probably would have sold their stock before the scandal hit full swing.

However, a normal investor will probably not take the time to dig through each company’s annual reports, analyze ratios or read the disclosure notes to find these price discrepancies.

Picking out individual stocks can be time consuming, risky and difficult to do without complete information. Of course, the individual investor still usually wants to invest in the stock market. There are ways to do this that are both safe and profitable.

At Wiser Wealth Management, we invest in Exchange Traded Funds (ETFs). ETFs track indexes, such as the S&P 500, and trade on the stock exchange. An ETF is similar to a mutual fund in that it is a combination of stocks, but that’s where the similarities end. Our ETFs do not come with a slew of broker commissions for unnecessary trades or mysterious 12B-1 fees. ETFs insulate the investor from company-specific risk and provide a simpler, more practical way to invest.

Article contributed by Paige Slusser

I am sure that the recent fallout in the market has many of you wondering what Greece has to do with US investors and how we can see a such a large decline in the stock market, even with job creation in the US. We will address that below.

I want to remind you that just as in 2008 when the US markets caused the world’s financial instability, that because we stayed the course and maintained our index allocations, the portfolios recovered with the market. Last summer, we rebuilt our index models to include more short-term bonds and purchased protection for those of you who needed it with a large exposure to the S&P 500. This move to overall more conservative portfolios and equity protection will help us weather this European crisis even better than the US financial breakdown. As of Thursday, May 6^th, all models remain in positive territory for 2010. We will continue to monitor and learn more about the European Crisis to keep you informed.

European Problems and Our Portfolios,

By:  Kyle Waller – Research Analyst

“Because major developed markets are now so highly linked, there is no way for problems in Europe to remain isolated there; we will see a ripple effect here in the US.”

The Greek government has recently agreed to receive a Eurozone government bailout from stronger countries in the EU. This bailout is very similar to the way many large US financial institutions were bailed out at the US taxpayers’ expense. In that case, the US government purchased assets from non-government companies. In the European case, governments are giving money to another government to prevent the risk of default of on bonds and other obligations.

The Greek economy is made of mainly government jobs, either direct government employment or subsidized employment. Overall, they have a weak free market system, which may be why people rioted in the streets Thursday due to 2% tax increases and dissatisfaction that the EU central bank did not choose to do more than its $145 billion rescue plan to stabilize the Greek economy.

Greece may be the first of many other bailouts that takes place to secure sovereign debt of other European countries.

The Effect

Such actions have caused the euro to decrease against other currencies, most significantly against currency alternatives to the euro as a major trade and reserve currency, i.e. the US Dollar, Pound and Yen. Significant losses have also occurred in both European bond and stock prices due to future profits becoming less secure. However, with fast, panicked selling, it is likely that the market has oversold many stock and bond holdings. Therefore, the opportunity to profit from this news has passed and it is unclear whether the market will continue to sell or regain some stability.

Overall, any company linked with global trading will be negatively effected and has already been. According to S&P analysts, the companies in the S&P 500 make up nearly 50% of sales from outside the US in recent years. With the S&P 500 making up nearly 80% of the US market, it follows that this would make US products more expensive to Europeans and therefore drop demand.

As uncertainty in Europe continues, uncertainty in the US will as well.  A Greek stabilization plan was passed on Thursday and should begin to stabilize that economy and its problems. There is still fear that other Euro countries may require the same actions, but the EU is showing its dedication to market stabilization.

Because major developed markets are now so highly linked, there is no way for problems in Europe to remain isolated there; we will see a ripple effect here in the US.

Going Forward

There are many factors affecting what is happening in the global marketplace and the US is a major player in all of it. Global investors are flocking to US Treasuries, increasing price through demand, which will help keep rates low. Low rates, in turn, increase demand for borrowing. In the same vein, though, demand for the US Dollar has grown, which has a negative effect on US exports and will slow a full recovery in the US, just like failing stock prices.

Going forward is about positioning portfolios to be participants in the global marketplace while being keenly aware of potential risks. We know that markets can act irrationally during unstable times and the answer for portfolios is to hold the course, maintain diversification and prepare for future risks.

Weekend Update

Just as I went to publish this note, the European Union, in a 12 hour weekend meeting, put their final stamp of approval on the Greece bailout. Many economists have dubbed the 1 trillion dollar package the “nuclear option,” but the EU sees the bailout as necessary to keep the euro from free falling in value. The risk going forward is repeating these steps with other countries. If Portugal, Ireland and Spain need the same type of bailout, Europe could easily spend another 500 billion euros. Today as this note is published, the US market is up 400 points in a positive reaction that maybe this is over. I believe that there is probably more to come and hope that it only lasts a week like in the Greece scenario.

Sincerely,

Casey T. Smith

President

Wiser Wealth Management, Inc

So why is an increasing employment rate good in this case?

The amount of jobs added went up in April even well above what is expected, adding 290,000 jobs to the market.  This is up from 200,000 added in March.

The fact that the employment rate is down is showing that there are more people actively looking for jobs.

The workforce, defined as those looking for employment and have employment, rose to over 800,000 according to the government, and despite increasing job numbers, percentages are down.

This means that optimism about job growth among the unemployed is rising, which is a positive.

Currently, if you die in 2009, the Federal Government will not tax your estate unless your net worth is over 3.5 million. After this individual exemption, a maximum tax rate of 45% applies. If you die in 2010, there is no death tax regardless of the value of your estate; there are rumblings that the House of Representatives may extend the 2009 schedule for one year, but the Senate wants a much larger exemption and significantly lower rates.

Currently, beginning in 2011, the death tax will come back with an exemption of 1 million per individual and a top tax rate of 55%. It is highly unlikely that Congress will do nothing since these 2010 and 2011 numbers seemed so far away when the estate tax laws were modified.

There are three key estate tax bills floating out there: Senate Bill 722, House Bill 2032 and House Bill H.R. 436.

Senate Bill 722 would make permanent the 2009 3.5 million exclusion and the top 45% tax rate. The bill will also reunify the estate and gift tax credit, allow for the transfer of a deceased spouse’s unused exemption to the surviving spouse and index the exemptions for inflation.

House Bill 2032 will make permanent the exemption level at 2 million, index that level for inflation and establish a progressive tax rate of 45 percent for estates valued between 2-5 million, 50 percent  for estates valued at 5-10 million and 55 percent  for estates over 10 million. The bill will also reunify the estate and gift tax, create exemption portability, restore the state estate tax credit and provide indexing for inflation.

House Bill 436 would freeze the exclusion and tax rate at the 2009 levels, reunify the estate and gift tax so that the cap on tax free lifetime gifts would go from the present 1 million to 3.5 million, limit the valuation discount for family limited partnerships and provide strict valuation rules for transfer of non business assets.

The Congressional Budget Office has a report out that offers four additional options.

Alternative 1 would set the exemption for the combined tax at 5 million starting in 2010, index that for inflation, set the tax rate equal to the top tax rate on capital gains, allow stepped-up basis for assets transferred from a decedent and deny a deduction or credit for state death taxes.

Alternative 2 would be the same changes as 1, but apply a two tiered rate where the first 25 million transferred would be taxed at the highest capital gains rate. Anything above 25 million would be taxed at 30% and indexed for inflation.

Alternative 3 would retain the 3.5 million exemption, index that for inflation, set the top tax rate at 45%, retain the step up in basis and allow a deduction for state death taxes.

Alternative 4 repeals the estate tax in 2010, retains the 1M gift tax exemption and institutes a carryover basis regime.

With respect to the four CBO options,  Ron Aucutt of McGuire Woods, LLP points out that “CBO reports like this, which are issued from time to time, are usually routine contributions to the data available to Congress. They analyze the estimated spending and revenue impacts of proposals known to be under consideration or seriously proposed. They typically do not develop new options on their own or make recommendations among options. Usually, the reports get relatively little public attention. But this time, presumably because of the high political profile of the cost of health care reform and the recent political spotlight on the CBO (including the unusual invitation of the CBO Director to the White House), this report inevitably has a higher profile. As with past reports, it purports only to analyze known options for altering federal spending and revenues.”

From a very broad sense, the best diversifier is between stock and bonds. From 1998 to 2001, the correlation between the two was -.49. This shows us that bonds were moving opposite of stock during that time frame.

I gave you that description to help explain a new report by Morningstar showing correlations of several asset classes prior to October 2007 and during the crash. We see in the chart below that diversification prior to the crash is much different than what happened during the crash. A great example is in international stocks. Prior to October 2007, the correlation to the S&P 500 was 0.57. During the crash, it moved up to 0.91, meaning that it was almost in lock step with the S&P 500. However, from 1980 to 2009, we see a correlation of 0.14. The two bright spots were Gold and Government Bonds. Both of these asset classes moved into negative correlation with the S&P 500 from October 2007 to March 2009, meaning that as stocks fell, these asset classes went up.

What we can learn from this is the magnitude of the 2007 – 2009 crash and how just about every asset class moved up in correlation to the S&P 500. By analyzing the correlation of these asset classes over the long term, it appears that we are diversified; however, during the bear market’s perfect storm of failing banks, consumer spending and government intervention, the textbook approach to diversification may have surprised many investors.

Recently, I’ve seen it reported that Harvard’s endowment portfolio performed well during 2008 because of alternative investments.  As it turns out, the reporter meant their fiscal year 2008, which ends in June. It was a perfect time to end the year, right before all asset classes lost significant value…great reporting.

So, as a follow-up to that original article, let’s look at fiscal year 2009.

The Wall Street Journal reported today that one of Harvard Endowment’s top bond managers made $6,300,000 last year, managing the fixed income portion of the now $37 billion fund. It has been announced that this manager is leaving the endowment. Why?

The endowment is forecasting one of its worst years, down almost 30% at the end of June and is positioning itself to become more liquid.

This move to become more liquid is the result of being very illiquid in the past.  So much so that during the credit crisis, the school had to make cuts, lay-off employees, and borrow money due to the endowment being tied up in illiquid investments like hedge funds and private equity.

The school and endowment like other schools’ endowments have more problems than I have quickly mentioned.  It seems that the endowment, created to provide for the schools needs (the school gets 34% of its revenue from the endowment), is now in a way holding the school hostage.

Before the credit crisis, the endowment’s illiquid investments helped the portfolio to average 14% annually. This over allocation (greed) ended up hurting the school.

This shows that there is a deeper problem in the financial services industry and should bring up the question; who’s serving whom?

After reading this article, I did a search for the FDIC’s failed bank list to see which GA banks were on the brink of failure. I quickly became aware that the FDIC does not publish its failure watch list. This makes some sense as this could cause a “run on the bank” that would cause the institution in question to surely collapse. They do publish the banks that have been taken over by the government.

This list for GA is quite lengthy, but after going through the list I could not help but notice one glaring similarity, but first, let me explain how I came to this discovery.

At Wiser Wealth, we manage CDs for many of our more senior clients. For a small fee, we can access CDs across the country and place them all in one brokerage account. This keeps our clients from driving across town and by using various banks, we can keep the entire account FDIC insured. Inevitably, a client would call me up and say that he was driving and saw a sign that said “Bob’s Bank”  had a 5%, 1 year CD.  I would explain that we could not do business with just any bank but only those that established a relationship with TD Ameritrade, our custodian. I also saw the CD advertisements in our local Marietta Daily Journal.

And so, as I looked over the failed bank list, I saw Alpha Bank, Integrity Bank and American Southern Bank. I realized that these banks were just a few I remembered offering these very generous 5% CDs.

A bank is on the FDIC watch list for several reasons, but one is certainly not having the funds to keep operations running. If a bank needs to raise deposits, CDs are one way to do this. And certainly if the funds are needed quickly, a 5% CD in this environment is certainly going to get the attention of the conservative investing public. I am not saying that every bank that offers a exceptionally high CD rate is on the brink of extention, but it should be noted that this pattern at least applies to our failed banks in Georgia.

Currently the FDIC insurance limit per person is $250,000 (until 2014). One should never exceed this at a bank, especially in this environment. A brokerage account filled with various bank CDs is  much more secure than all your savings at one bank, no matter what the institution size.

Certainly these banks did not get on the failed list because of 5% CDs. In Georgia, most of these banks failed because of unpaid loans from real estate. Regardless, the old saying that “there is no free lunch” applies here!

Casey T Smith – Wiser Wealth Management, Inc

A blog posted on CNNMoney.com’s Money and Main Street, Click Here, discusses a vague disclosure report from the White House concerning President Obama’s household assets and investments.

Page two of the original report, which the blogger links to, lists the President’s assets, where and what they are held in and an estimated value.

What is most interesting is that the President has somewhere between $1-5 million in US Treasury Bonds and the second largest holding of somewhere between $115-250 thousand in the Vanguard FTSE Social Index.

The Obama Portfolio

When President Obama was first elected, there were many people who advertised “Obama Portfolios.”  As it turns out, the original Obama Portfolio favors US Treasury issued debt and socially responsible companies in a simple index fund package.

The interesting part is that the President of the United States, who would have the best investment advisors at his disposal, chose a low cost, diversified portfolio of US stocks.

For 15 years, QAIB has shown that investor returns lag what performance reports and prospectuses would lead one to believe is acheivable.  While those returns are, in fact, theoretically acheivable, the reality is that investors are not rational, and make buy and sell decisions at the worst possible moments.

2008, like all the over years shows investors losing more than the market.  Last year (2008) equity fund investors lost 41.6% and the S&P 500 lost 37.7%.

DALBAR included in their report that investors guessed market directions right 42% of the time by buying low and selling high.  That means that 58% of the time investors bought high and sold low.  For example most investors sold after the September melt down, realizing their losses.

So everyone involved had a bad year last year but the key thing to point out is that the people who paid for it (mutual fund investors) did worse than those that could have just bought the S&P 500 index.  Some mutual did do better than others but what DALBAR points out is that the average investor did worst by investing in mutual funds compared to the old S&P 500 which cannot avoid or side step anything like mutual fund managers can.

What this data says to us is that investors are far better off

1. Investing using index funds, building highly diversified portfolios.  We happen to use ETFs
2. Investing with a good adviser can help reduce the gap between market returns and average mutual fund investors returns.

• The above statements correspond with our Wiser Advice, Keep costs Low, Diversify, and Always Invest for the Long Term

To correct some of these investor behaviors that lead to this underperformance, DALBAR suggests

• Dollar cost averaging
• “Purpose Driven Asset Management” for advisors, which is splitting up clients assets into different investments that are for different purposes.  This strategy is designed to help calm clients panic and fears.
• For advisors to provide a better understanding to clients the investment’s leverage exposure.

For more information about the study, click here.

To learn more about us as wealth managers, visit the ‘About’ tab at the top of this page, or visit www.wiserinvestor.com.  You can also use the ‘Contact Us’ at the top of the page to have your questions answers and learn more about how we can lower the gap addressed above.

For a more in-dept news report, click here.

In 2008, many hedge funds, once available only to the wealthy, closed their doors, loosing all their investors’ money, or stopped allowing withdrawals from accounts. One of the biggest financial investing scams was uncovered, loosing overall billions and for several prominent families and charities, millions. I have never understood why someone would invest in a vehicle that would not disclose its holdings or require money to be locked away for a lengthy period.

I have never been in combat or seen first hand the death and destruction afterwards but I can see how witnessing such events could leave a person with a great emotional burden. This is the best way I can describe how I feel about 2008. I have spent many sleepless nights wondering how I could make the financial punishment stop, only to awaken to a significant market rebound that a few days later retreated to make another new low.  I have wondered if long term buy and hold investing is dead and if we have to invest in the stock market like one would play in Vegas. I have spent countless hours agonizing over how to deal with investments strategies that worked for years and now have been brought down by the market’s terrible losses. I carry a heavy burden knowing that each client has entrusted to me to look out for their financial well being and I take this responsibility very seriously.

After a careful review of our passive indexing approach to investing, I still see the benefits of long term index investing. While our portfolio returns varied all across the spectrum of portfolio risk, overall long term (5 years +), we still show better returns vs. risk than picking individual securities or hiring a fund manager.  The question is when the market will start a recovery.

Market history shows us that after the October 1987 market crash it rebounded 14% after one year and 96% in 5 years. The stock market crash in 2001, due to the September 11th attacks lost 20% after the first year and gained 40% after 5 years. This shows us that time will heal market wounds but it will require much patience.

I am not making any predictions for 2009 other than to observe that there have been billions of dollars pumped into financial systems around the globe and this will eventually come to fruition. The incoming administration is considering additional stimulus that now seems appropriate to implement. Large institutional investors appear to be investing back into the market. We can see this by the volume of buys even as more bad economic data is published.

This Quarter I am participating in some seminars around the world. This is new to me and I am very excited to have received the invitations. Next week Kyle and I will be in Boca Raton presenting at the Inside ETF Conference. Our session is on the practical applications of Exchange Traded Funds. In late January I will be doing two workshops for the 1700 ASA pilots. This workshop will focus on the group’s JP Morgan 401K plan. In February we will be in Singapore to present at the ETF Asia Conference. Kyle and I will be doing a one day workshop on the basics if ETF’s and how to build ETF portfolio.

Exchange Traded Funds are relatively new to those markets and we expect a large turn out. On day two of the conference I will be speaking to 200+ of my Asian peers about the difference between an Exchange Traded Note and an Exchange Traded Fund. I hope that as Wiser Wealth grows, these experiences will help set me apart from other firms.

Starting out in 2009 we have several families that are themselves or have loved ones hospitalized due to illness. I pray that each of you have a speedy recovery and that good health returns for 2009.

I will close this quarterly newsletter with a quote from Ben Stein, whom I met at a TD Ameritrade Conference in 2007. This is from his article “More Lessons From the Financial Crisis.”

“I will take some comfort in knowing that even Warren Buffett’s stock fell by about 45 percent in the 2007-2008 debacle; if the father of value investing could feel he had made mistakes, and if the gurus of value investing got clobbered, then I will not torture myself too much about the horrible year and a quarter just passed.

“After all, my wife has not lost value. My dogs have not lost value. My son has gained greatly in value by getting engaged to a fabulous young woman. My friends have not lost value (but, sadly, there are fewer and fewer of them). The sunshine outside my house in Rancho Mirage, Calif., has not lost value, and every year I have left has greater value because of scarcity.”

Happy New Year!

Casey T Smith – President – Wiser Wealth Management, Inc

Bogle says now is the time to bet on a long term market recovery and now individual stocks.  He thinks it will take 1 to 2 and 1/2 years before the economy recovers.

He’s a quote of some advice Bogle gives that needs to be quoted,

I think investments you continue to hold through this decline will give you a return better than you can find in other places. And that is a crucial part of this analysis. We know what bond returns will be in the next 10 years – roughly 5 percent for long-term government bonds or about 4 percent for short- to intermediate-term bonds. So if stocks produce 6 percent, while you endured the volatility, you increased your total return.

Money-market funds are now yielding less than 2 percent – call it about 1.5 percent. That doesn’t look anything like 6 to 9 percent for stocks, especially when you compound them over a decade. I would not flee the market now.

Bogle is still very positive about the stock market, at the age of 79, bogle says he is 80% allocated into bonds and advices to allocate to bonds the age you are currently at.

Read the full article Here.

These increases are because mutual funds have actually dollar costs, many being fixed cost.  They then set fees according to their assets under management.  So as their total portfolio values drop due to their investing and investors it mass pull money out of these funds, the fees no longer are adequate.

This is why we will see increases among to most damaged mutual funds.  International funds may be among the largest category to increase its fees.

• S&P Pharmaceuticals ETF (NYSE Arca: XPH)
• Lehman Aggregate Bond ETF (NYSE Arca: LAG)
• Lehman 1-3 Month T-Bill ETF (NYSE Arca: BIL)

What this means

ETFs are known for their tax advantages over mutual funds who often give investors unwanted taxable capital gains at the end of the year.  What drives many out of these funds if getting hit with capital gains and big loses.  This capital gains issue represents a big mismanagement by SSgA and they should be scolded since they are a leader in the industry.

Read a full article about it here

To punish bad market timing decisions, Direxion has put out several ETFs that give 300% daily return (or 3x inverse return) relative to each respective benchmark.

How the punishment works.

Leveraged ETFs, by design aren’t made to be held for the long term, hence, they only provide 2x or 3x the daily return.  Powershares has a PDF on their website that explains this principle involving geometric return.  Basically, during volitily markets the upside of this ETFs do not make up for the downside.

So, the investor holding these ETFs only does so for very short periods of time, maybe a day or two.  Today Nov 20th, some decided to bet that the S&P would have an up day and were wrong.  The Leveraged ETF investors were 3x as wrong as regular market times and paid 3x as much.  Losing 17% in one day when the S&P 500 is down 6.71%.

This pain is worsened by how the market works.  Panic often seems to drive prices lower than they should be fairly priced.  However, panic is never sensible, wildly driving prices to fair value.

Mutual fund through their portfolio managers deliver return each year whether positive or negative.  The vast majority of Investors, investing in those mutual funds have very clearly received less return on their invested money than the funds performed.

Why?

Because investors on the whole tend to invest during market rallies (the peak of a cycle) and after the rally falls from its high price, investors sell.  This by definition is buying high and selling low.  This is worse investing strategy there there is.  The difference between what investors make and what their mutual funds make is coined the Behavior Gap.  At BehaviorGap.com they preach that your investment returns are determined by your behavior.

Enjoy BehaviorGap.com

“President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services,” said Cole, also a UCLA professor of economics. “So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies.”

A few well know TV financial analyst have been heard saying to move everything to cash, run for the hills this is the next Big Depression. This week James Stewart wrote an article for the Wall Street Journal’s Personal Journal titled “Even the Great Depression Couldn’t Keep Stocks Down.”

In this article Stewart explains that during the Great Depression the S&P 500 fell 86% from September 16, 1929 to June 1, 1932. In September 26, 1930 the market was down 40% one year into its bear market.  Currently we are one year into our current bear market and the S&P is also down 40% from its October 2007 peak. If you bought stocks at this time in 1930 you lost another 40%.

If you had invested $100 in 1928 by the end of 1930, it was worth $98.75. At the end of 1935 it was worth $110.18, a 12% gain. In 1940 during World War II it was worth 107.37, still a 9% gain. If you held on to your investment for 20 years, it was worth $355.60, a 260% gain. During this same time, cash appreciated little and short term treasury’s rose 81% (far cry from 260%).

If you are in the accumulation phase of your life, this is a once in a lifetime opportunity to invest in oversold and undervalued stocks. How do you take advantage of this opportunity? Increase your 401K contributions, open up and or max out your IRA contribution. If you can pick your investments choose ETF’s or index funds and diversify your portfolio in large, mid, small and international stocks. If you want professional advice stay away from the large brokerage houses and banks, these are not financial experts, their sales associates that sell financial products rather than golf equipment at your local golf store. Instead seek out a fee only investment advisory firm in your area and from that list look for the ones that use index or DFA funds.

As to what the TV financial analysts are saying; I am on my fourth week of a no talking head diet! Long term investing to these guys is probably about 1 hour; the length of their show and now my additional time with my wife and two children.

Maintain a diversified portfolio, keep investing cost low and always invest for the long term.

www.wiserinvestor.com

“I think if you have some principles and know what you’re doing, the market responds. They see that you have some structure to your actions, that it isn’t just ad hoc — you’ll do this today but you’ll do something different tomorrow. And the market respects people in supervisory positions who seem to be on top of what’s going on. So I think if you’re tough about firms that have invested unwisely, the market won’t blame you. They’ll say, ‘Well, yeah, it’s your fault. You did this. Nobody else told you to do it. Why should we be saving you at this point if you’re stuck with assets you can’t sell and liabilities you can’t pay off?’” But when the authorities finally got around to letting Lehman Brothers fail, it had saved so many others already that the markets didn’t know how to react. Instead of looking principled, the authorities looked erratic and inconstant.”

Read full article wsj-interview1

We are not the only ones who are making the most of the current opportunity.  The following article is an Op-ed piece written for the New York Times by the “Oracle of Omaha” (Warren Buffett), in which he discusses his view of the current market.

Buffett – New York Times

Video: What’s Behind the Relentless Selling

While short-term stock-market movements can’t be foretold, the likelihood is that the market will recover before the economy or general investor sentiment do so, and ‘if you wait for the robins, spring will be over.’

He talks more about the Great Depression and how much stocks increased from 1932 to 1933 (30%).  Read full article here.

It has long been known that Warren Buffett took after Benjamin Graham, author of “Security Analysis” and the father of value investing.  What’s interesting about Graham is that at the end of his career, he quits stocks altogether because of the uncertainy involved.  Here’s a quote from a WSJ article WSJ Article about Graham and his book “Security Analysis”

Just as the roughly 90% fall between 1929 and 1932 had seemed to be fading, the stock market dropped sharply again in the late 1930s. As market historian James Grant puts it, by the time Graham was ready to finish the 1940 edition, “He had had it.”

That helps explain one of the great ironies of market commentary. Graham himself stuck largely with stocks in his investment fund. But at the conclusion of his book, he advised the institutional investors among his readers to shun the stock market entirely and invest in bonds. Graham doubted they could stomach “the heavy responsibilities and the recurring uncertainties” stirred up by stocks.

Investing has and always been, and will remain, an operation in which wealth is transferred from those without a working knowledge of financial history to those who have one.

Keeping that in mind please look at these charts done by Morningstar about market recoveries and the effects of diversification among asset classes.  Charts and all information by Morningstar, Inc

Even during the Great Depression, the best investment results were earned not by the people who fled stocks for the safety of bonds and cash, but by those who stepped up and bought stocks and kept buying on the way down. A man named Floyd Odlum made millions of dollars putting his cash into battered stocks. His motto throughout the market nightmare of 1929 to 1932 never changed: ‘There’s a better chance to make money now than ever before.’

During these hard financial times, our investment strategies are pressed since this market crisis looks different than last time (they always have), we are forced to make decisions.  Just like Floyd Odlum in the 30s, our behaviors matter.  It’s okay to be fearful but not act out of fear, acting sensibly and not in panic is what has prevailed throughout every market cycle.

Hedge funds are known for their daring bets, secretive (proprietary) strategies, and the 2 and 20 fee (2% of assets and 20% of profits).  It has come to many people’s attention that hedge funds have not been hedging market risk for their clients since several have shut down this year during the bear market.  Hedge funds are not required to report earnings, investments they hold, or strategy.  During booming markets many hedge funds publish their unbelievable returns and attract many high net worth clients looking for above ordinary returns. 

It was reported today in the WSJ that some of these hedge funds are being forced out of business because in some cases 50% of their entire portfolios consisted of one company.  The idea is to take big bets proving their excelent forecasting skills, but one unforeseen mistake have cost many managers their funds and businesses.  Also other hedge funds have been unable to find ways around the temporary ban on short selling stocks. Here’s a quote from this morning’s WSJ article, “Big Bets Come Back to Bite Fund Managers”

To wit, a basket of stocks most popular among hedge funds tumbled 19% in September, more than the 9% drop for the Standard and Poor’s 500, according to Goldman Sachs.

Who would have thought that an S&P 500 ETF would have beaten hedge funds who have always attracted the best analyst and have the ability to side step companies who are plummeting?  Warren Buffet does.    Investment strategies must be able to weather all economic conditions because all economic conditions happen.  Again, diversification wins and the lower the cost, the more money you keep.

Video:  Bogle: Keep Investing – Morningstar Video

The rule began with futures traders who must maintain a margin account with their broker and adjust their margin accounts according to the current value of their futures portfolios.  However, special options that don’t trade on the open market like credit swaps or interest rate swaps do not have price information readily available and therefore have a hard time accounting for value.  Companies like Enron used this loophole to commit fraud and in 2007 all companies were required to account for financial assets and liabilities as if they were to be sold and recognize the gains/losses in that year.

The problem is that many companies in the news right now had huge portions of level 3 assets on their books.  Here’s a good definition I found,

Level 3 consists of unobservable inputs, such as those that reflect the reporting entity’s own assumptions about what market participants would use to price the asset or liability (including risk), developed using the best information available without undue cost and effort, according to FASB. There is no verification requirement if the assumptions are in line with those of market participants.

Since the housing crisis, companies have had to “Mark-to-Market” those assets and liabilities which are very hard to value.  What makes the problem so bad as to make companies like Lehman Brothers go bankrupt is that they are using those level 3 assets as leverage to raise capital.

For more about this read this article published November 7, 2007.  It has some great priditions about Lehman, Merrill, and Citigroup.

Let’s be clear that this bill was not a free bail out for the rich; it is a plan to provide liquidity to the US financial markets. The US Government is investing in the US Economy by loaning money to banks at relatively high interest rates. The other part of the package is to create an entity that buys up the securities that are causing the problems in this market. This buy up will basically replace the bad assets with cash. After the financial markets stabilize the government could issue the purchased securities back into the market place for a profit. If the Government does not get repaid from the loans, then they will get ownership of the company in question. In my opinion, either the US Government issues the loans or we will have more foreign investment into US Corporations.

Once the Government passes an investment package, we will recover a lot of what was lost today. These last few weeks have been very difficult to long term investors, but we must stay the course. For those of you living on your portfolio, you must remember that you are still receiving your dividend payments. Your annual income has not changed, however the portfolio value at the end of this quarter will be difficult to swallow.

Our strategy is to invest assets into the world markets for long term growth while keeping company risk and investment cost low. With over 4800 stocks in our portfolios, no one company affects our performance to a significant degree. What is required in times like these is to keep a cooler head than the market.

If you are in the accumulation phase of saving for retirement, this is a great time to add additional money to an S&P 500 index fund. Any investment now will have great results in 3 – 5 years. Hopefully sooner!

Maintain a diversified portfolio, keep your cost low and always invest for the long term.

This is why I believe we are not facing a long term bear market.  Goldman Sachs is getting a $5 billion investment with potentially $5 billion more investment from Warren Buffet.  The financial sector has been dealing with this one huge problem, which i discuss in a previous blog.  Microsoft and Nike announced a multi-billion dollar stock buyback program.  Microsoft was given a AAA credit rating by Moody’s.  To us, this signals that business models who receive cash for providing products or services are weathering this market with steady earnings.

Video: Investment Strategies

So everyone has seen the news and knows what is happening with many Wall Street financial companies, but why banks, why financials?  First of all, banks make money by borrowing money from other banks (Central Banks) and then lending that money out, charging a higher interest rate than they received on that money.  The rate that banks borrow money at is determined by their credit rating.  This is why it was so bad last Monday when AIG’s credit rating was downgraded, taking away their ability to borrow cheap money and lend it out at a higher interest rate.  Also, banks use assets on their books to leverage against the money they borrow.  When it turns out that most of their mortgage assets turn out to be worthless and the assets that they use to borrow money against are no longer their on paper, banks are forced to take huge losses and this prevents them from operating business as usual.  So, what started a year ago with sub-prime mortgages is still affecting many banks because of the “bad” debt on their books.  Some banks have been able to locate which debt was ‘bad’ and write these losses off while other banks have not been able to effectively locate and write off this debt creating huge problems.

The problem with the economy has largely been driven by this bank business model suffering.  This is called business risk and we have seen this business risk affect the entire financial sector recently.

Despite the changes seen on wall street, stocks as a whole remain intact.  The government made some very big decisions that have calmed fears on Wall Street and for the most part stopped the panic selling.

If we can take away any lessons from this last week it is that panic driven selling does not work and is not a strategy for your portfolio.  Remaining diversified again worked this week.  Below is a graph of numbers for the week.  Notice that the week looks like any other week on Wall Street.

Source: “Market Update” Yahoo Finance

Note: Casey T. Smith, President of Wiser Wealth Management, Inc provided many insights for this blog post

This November as a new president is decided for America, the Dow Jones Industrial Average drops over 500 points in one day (September 15), the S&P 500 is 28% below its high posted 11 months ago signaling that we are in a Bear Market, Lehman Brothers files bankruptcy putting $600 Billion of its assets up for sale, and AIG, Fannie Mae, and Freddie Mac should have gone under if not for bail outs to continue operations from the Federal Reserve and Treasury.  In the amidst all of this unemployment is above average, inflation is high, the dollar is weak, and gas is outrageous.  Terrorist still threaten what America stands for and American Soldiers give their lives to protect America everyday, very far from home.  This is a very brief list of examples of why November matters.

Capital-gains tax was lowered by Bill Clinton to 20% from 28%.  George W. Bush, once in office, lowered this tax rate on long-term capital gains tax to 15% where it currently is now.

• John McCain has made it clear that if elected he will maintain the 15% tax rate on the ‘unearned income’ called capital gains.
• Barack Obama has been unclear on a number but has said that “… we can have a capital-gains tax higher than 15%.”  However he has made it clear that he would not extend the highest rate that Clinton had in office of 28%.  Obama says that this decision to raise capital gains tax comes from advice from “people like Warren Buffet” who say that an increase in the range of 20-25% will not change investment decision making

Commentary:

The most common form and most efficient way Americans save for retirement and the needs of their families when they are unable to earn income is through the Capital Markets (stock market and bond market).  As they invest through the years holding assets or debt of public companies, the value of the assets increases by price increases and dividend payouts.  Once in retirement, these assets are sold over time to provide current income from past savings.  Capital-gains is the difference between the selling price and the buying price.  This ‘profit’ is taxable when held outside of a tax-sheltered account, and even some of these tax sheltered accounts force one to move money out at a certain age.

Until recently large companies would pay excess profits to shareholders in the form of dividends and these dividend checks would provide current income in retirement and more savings before retirement.  Today, These large companies are using the profits that they usually would have used for dividends to buy back company stock and retire the shares.  There are three reasons management of a company would do this: 1.  buying back company stock and retiring the shares increases the price and value of the remaining shares on the market, increasing capital gains.  2.  Management of companies are more and more compensated by stock options which increase in value as the stock price of the company increases in value.  3.  the income from dividends has long been taxed at an investors income tax rate which is usually much higher than the capital gains rate.

Stock buy back is an effective way to compensate shareholders but since there has been a shift in how baby boomers will ‘cash out’ there their retirement portfolio to live off of, there is a new focus on the tax rate that they will pay on their savings.

Also, with a stock Market that is so efficient with thousands of professionals following every stock in the US and everything that happens on Wall Street, the individual investor will be very disadvantaged when the stock market enviably has a massive sell off of stocks to capture the current low capital gains rate when a president is elected who will raise capital-gains taxes.

In Closing:  having the right to choose between two very different presidential candidates is an important symbol of the freedoms we have in America.  This log was certainly biased against Senator Obama since he has the least favorable tax policies for professional money managers who deal with clients portfolios, but when evaluating a candidate it is important to think about the situation as ‘do the benefits outweigh the cost.’

Source: Financial Intelliegence Report

With all things financial, behavior is a key factor that separates successful investors and unsuccessful investors.  Now, I don’t mean that you can pick better stocks and I am not talking about the popular topic of Behavioral Finance which is a completely different and irrelevant thing.  Behaving well for the individual investor is having a well thought through game plan which involves a professional that is seasoned and is FEE based NOT commissioned based.  If you want to learn more about the importance of fee based advisor click Here and click services=>Investing=>Wiser Advice and to learn about the importance of investor behavior visit behaviorgap.com.

Here’s some quotes to ponder as you look at your investment strategy.

“Investing has and always been, and will remain, an operation in which wealth is transferred from those without a working knowledge of financial history to those who have one.” -William Berstein

“It’s bad enough that you have to take market risk. Only a fool takes on the additional risk of doing yet more damage by failing to diversify properly with his or her nest egg. Avoid the problem—buy a well-run index fund and own the whole market.” -William Berstein

“You don’t need to participate in [the financial system's] expensive foolishness. If you choose to play the winner’s game of owning businesses and refrain from playing the loser’s game of trying to beat the market, you can begin the task simply by using your own common sense, understanding the system, and investing in accordance with the only principles that will eliminate substantially all of its excessive costs.” -John C. Bogle, Vanguard

“The biggest investment mistake people make is focusing on last year’s mutual fund performance and not on what really drives returns.” -Barbara Raasch, Ernst and Young

“In the short term the market is a voting machine, in the long run it is a weighing machine.” Benjamin Graham (father of value investing and author of “Security Analysis”)

“To invest intelligently in securities one should be forearmed with an adequate knowledge of how the various types of bonds and stocks have actually behaved under varying conditions—some of which, at least, one is likely to meet again in one’s own experience. No statement is more true and better applicable to Wall Street than the famous warning of Santayana: ‘Those who do not remember the past are condemned to to repeat it.’” -Benjamin Graham

So, to take these stock market proverbs to heart you should do three things; Keep Cost Low, Diversify, and Invest For The Long Term.