FED TAPERS MARKETS SOAR

In a widely anticipated announcement, the Federal Open Market Committee announced today that they are beginning to taper the amount of money spent on a monthly basis to buy government bonds and mortgages.  The goal of the program (an aspect of quantitative easing) was to bring down and keep down interest rates so that money remained cheap and that investors would have to invest in the stock market to get any yield on their assets.  From a pure asset appreciation sense, the program has been largely successful.  However, it has not had the immediate desired effect on the economy and joblessness.  Furthermore, the jury is still out on the long-term effects of the program and how the Fed liquidates its massive holdings.  Today's announcement reduces the amount of bonds and mortgages purchased monthly by $10 billion - the Fed will still be buying $75 billion of government instruments.  The amount of the taper is relatively insignificant but the symbolic nature is not to be overlooked.  When the Fed hinted at a taper a few months ago, the markets quickly and sharply sold off.  Today, however, the market bolted upwards.  What has changed from a few months ago?  There were a couple of things at play today.  First, Chairman Bernanke let it be known that even though the Fed was reducing its buyback it was not considering increasing interest rates (the bigger part of quantitative easing) for some time.  Previously, the Fed had guided that the interest rate decision would be linked to the unemployment numbers.  Bernanke's testimony today made clear that unemployment measures would be less important than previously announced and that interest rates will remain low for some extended time.  Secondly, the economy continues to show some life and improvement, albeit very slow and in a two steps forward, one step back kind of way.  Nonetheless, things are improving.  Now we will begin to see if the economy is strong enough to stand on its own as the Fed begins to step aside. 

To many, the jump up today on the heels of the Fed announcement comes as a surprise.  However, one should still be careful as the knee jerk reaction to market moving news is oftentimes reversed as traders have time to reflect upon things.  Time will tell and we will know more in the next couple of days.  Regardless, it appears that Santa was sighted today and may be here for the rest of the year.

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HO HO HO or OH OH OH

MARKET BUBBLE - A GROWING CHORUS

Nobel Prize economist warns of U.S. stock market bubble

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STUFFED TURTLES, ELEGANT DINING, AND DANGEROUS MARKETS

NOT TOO HOT, NOT TOO COLD BUT JUST RIGHT

Today's delayed release (due to the government shutdown) of the monthly payroll report came in weak but not too weak.  The market appears to like the number as the S&P is tacking on an additional 12 points at the time of this post.  We are in the very strange time where the markets are actually wanting benign numbers.  Economic reports that come in too strong could lead the Federal Reserve to accelerate their tapering of quantitative easing and easy money.  Economic reports that come in too weak could lead to a recession and the failure of the Fed's monetary strategies.  So, the report today was just right.  Weak but not too weak.

Earnings season is in full swing and have largely been in lockstep with expectations to this point.  Corporate profits continue to hold steady while, generally, revenue numbers disappoint.  If there is a greater slowdown, corporate profits could really suffer as most companies have already done all the cost cutting they can. 

The government shutdown will certainly have an effect on the economy and the employment situation.  We will have to see if it is just a one month blip or something more persistent.  If the latter, then the market will have to determine how weak the numbers can be before getting too nervous.  Time will tell.  For now, the markets remain in a state of bliss (ignorant or not is open to question) and higher prices look to be coming despite many negative technical warnings and an anemic economy.

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WHAT ARE THEY THINKING?

The Most Dangerous Place to Live (hint: It is home to the Big Orange and that Black and Gold in Nashville)

Most Dangerous States

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THE BAR IS OPEN AND THE 4 AM CALL

WHEN WELFARE PAYS BETTER THAN WORK

When Welfare Pays Better Than Work

YOU CAN BUILD THE IRON MAN SUIT

One of the greatest convocation speeches.

WEAK BOUNCE

To this point, the markets have only managed a weak bounce from oversold prices.  This does not bode well for the short term and the markets will have to stage a rally soon or the bears will take full control and we could easily see another quick 2-5% drop in equity prices.  The economic news out today was generally positive led by a better than expected GDP report.  Tomorrow we will get another round of economic indicators.  It is hard to know if one should cheer for positive data (and risk the Fed tightening up on their liquidity) or cheer for bad data so that the Fed will continue to pump money into the system.  In any event, the markets are weak here and poised for another potential break-down.  Extra caution is warranted until things settle down a bit. 

BAM MARKET WRAP

IS THIS TIME DIFFERENT?

BIDING TIME

The market is in a tight trading range with the S&P bounded by 1700 on the upside and 1685 on the downside.  Breaks in either direction will likely lead to the next big move.  While there are a number of dark clouds on the horizon, the markets have generally ignored all storms in 2013.  At some point, the bulls will not be able to withstand the pressure and a larger decline will occur.  With the talk of Fed tapering, a debt ceiling debate, changes in the Fed leadership (and policy?), upcoming elections, unrest in Egypt, and the historically weak month of September fast upon us, it is not the time to get aggressive.  We will continually reassess but, for now, a conservative posture is deemed prudent with the information available.  The market's resilience has proven a thorn in the side to those of us who have been expecting a larger decline but rest assured it will come (maybe sooner than many think) and we will be glad we have taken a more cautious approach.  In the meantime, we remain invested to capture some of the gains and are ready to make portfolio adjustments whichever way this market breaks.

WELL WORTH A LISTEN

Jeremy Grantham is a British investor and co-founder and chief investment strategist of Grantham Mayo van Otterloo (GMO), a Boston-based asset management firm.  GMO is one of the largest managers of such funds in the world, having more than US $97 billion in assets under management as of December 2011.  Grantham is widely regarded as a highly knowledgeable investor in various stock, bond, and commodity markets, and is particularly noted for his prediction of various bubbles.  In this engaging and thought provoking interview with Charlie Rose, Mr. Grantham shares his thoughts on the US and world economies and what potentially lies ahead for years to come.  It is a fascinating interview and well worth listening to in its entirety.  While long (roughly an hour), Mr. Grantham touches on a number of thought provoking subjects far beyond what many are talking about.  

Jeremy Grantham

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OPTIMISM RUNS HIGH - IS IT WARRANTED?

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OUCH!

CHANGES IN MARKET CHARACTER

Over the last week or so, the markets have endured a mild correction.  The jury is still out on whether or not it is over but it is indisputable that the nature of this recent weakness is very different from bouts of selling earlier this year.   Generally speaking, in a market correction investors flee to the safety of treasury bills driving the rates on those instruments lower.  However, over the last 4 weeks the 30 year treasury rate has actually increased 16% and the 10 year rate has increased over 28%.  As a result, interest sensitive sectors have been hit much harder in recent weeks than the economically sensitive groups.  Talk of the Federal Reserve tapering off their quantitative easing and entering into a more tightening monetary policy has led, in part, to the recent sell-off.  Is the nature of the recent decline and the affected groups a sign of things to come?  After all, quantitative easing cannot last forever...  It is certainly worth watching and considering.  As we have mentioned in our newsletter a number of times over the last year, many investors will be surprised that their "safe" allocation to bond funds is really not that safe in a rising rate environment. 

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SELL IN MAY ... ER... JUNE

13 WORST PREDICTIONS MADE ON EARTH DAY, 1970

13 Worst Predictions Made on Earth Day, 1970

By Jon Gabriel on April 22, 2013
The 1970s were a lousy decade. Embarrassing movies, dreadful music and downright terrifying clothes reflected the national mood following an unpopular war, endless political scandals and a faltering economy.

Popular culture was consumed with decline, especially Hollywood. The Omega Man, Soylent Green, Damnation Alley and countless other dystopian films showed a planet wrecked by war, pollution and neglect. In large part, the entertainment industry was reflecting the culture at large.

In 1970, the first Earth Day was celebrated — okay, “celebrated” doesn’t capture the funereal tone of the event. The events (organized in part by then hippie and now convicted murderer Ira Einhorn) predicted death, destruction and disease unless we did exactly as progressives commanded.

Behold the coming apocalypse as predicted on and around Earth Day, 1970:

"Civilization will end within 15 or 30 years unless immediate action is taken against problems facing mankind."  — Harvard biologist George Wald

"We are in an environmental crisis which threatens the survival of this nation, and of the world as a suitable place of human habitation." — Washington University biologist Barry Commoner

"Man must stop pollution and conserve his resources, not merely to enhance existence but to save the race from intolerable deterioration and possible extinction." — New York Times editorial

"Population will inevitably and completely outstrip whatever small increases in food supplies we make. The death rate will increase until at least 100-200 million people per year will be starving to death during the next ten years." — Stanford University biologist Paul Ehrlich

"Most of the people who are going to die in the greatest cataclysm in the history of man have already been born… [By 1975] some experts feel that food shortages will have escalated the present level of world hunger and starvation into famines of unbelievable proportions. Other experts, more optimistic, think the ultimate food-population collision will not occur until the decade of the 1980s." — Paul Ehrlich

"It is already too late to avoid mass starvation," — Denis Hayes, Chief organizer for Earth Day

"Demographers agree almost unanimously on the following grim timetable: by 1975 widespread famines will begin in India; these will spread by 1990 to include all of India, Pakistan, China and the Near East, Africa. By the year 2000, or conceivably sooner, South and Central America will exist under famine conditions…. By the year 2000, thirty years from now, the entire world, with the exception of Western Europe, North America, and Australia, will be in famine." — North Texas State University professor Peter Gunter

"In a decade, urban dwellers will have to wear gas masks to survive air pollution… by 1985 air pollution will have reduced the amount of sunlight reaching earth by one half." — Life magazine

"At the present rate of nitrogen buildup, it's only a matter of time before light will be filtered out of the atmosphere and none of our land will be usable." — Ecologist Kenneth Watt

"Air pollution...is certainly going to take hundreds of thousands of lives in the next few years alone." — Paul Ehrlich

"By the year 2000, if present trends continue, we will be using up crude oil at such a rate… that there won't be any more crude oil. You'll drive up to the pump and say, ‘Fill 'er up, buddy,' and he'll say, ‘I am very sorry, there isn't any.'" — Ecologist Kenneth Watt

"[One] theory assumes that the earth's cloud cover will continue to thicken as more dust, fumes, and water vapor are belched into the atmosphere by industrial smokestacks and jet planes. Screened from the sun's heat, the planet will cool, the water vapor will fall and freeze, and a new Ice Age will be born." — Newsweek magazine

"The world has been chilling sharply for about twenty years. If present trends continue, the world will be about four degrees colder for the global mean temperature in 1990, but eleven degrees colder in the year 2000. This is about twice what it would take to put us into an ice age." — Kenneth Watt
Quotes from "Earth Day, Then and Now," by Ronald Bailey, Reason.com. May 1, 2000.

BAM MARKET WRAP

LONG AWAITED CORRECTION?

IRS NOW WATCHING YOUR FACEBOOK PAGE AND TWEETS!

The IRS is watching you...

A PUNCH IN THE GUT

This morning's job report caught many off guard.  While the expectation was job creation of somewhere in the 200,000 range, the actual number came in at a paltry 88,000.  The futures market immediately took note and dropped a full percentage point on all of the major indices within 60 seconds of the release.   Looking beyond the headline numbers, it is hard to find any silver linings.  The labor participation rate (those actually in the work force) dropped to its lowest level since 1979 and there are now a record 90 million Americans that are no longer even looking for work.  The labor participation rate comes in at 63%.   The increase in the number of people leaving the work force actually served to reduce the headline unemployment rate illustrating how irrelevant this number has become.  It should also be noted that retail lost jobs while professional services gained jobs in line with previous months.  The lost retail jobs have nothing to do with sequestration and have everything to do with the increase in payroll taxes and consumers having less to spend.  Job losses having to do with sequestration will primarily hit the government jobs and the private sector professional service jobs.  Those potential job losses will begin to show up in months to come.  The numbers do not bode well for future reports. 

Where does this leave us?  It will be interesting to see where the market closes today and where it is after Monday's close.  Often the knee jerk reaction of the market is reversed within a day or two so we shall see.  If there was a shock needed to get those thinking about selling to sell, today's release is as good a reason as we have had in a while.  Alternatively, many had come to believe that the Fed was beginning to think about scaling back their asset purchases (taking away one of the biggest drivers of the market increase over the last 4 years).  However, today's numbers throw cold water on any thoughts that the Fed will be done any time soon.  Perhaps traders would rather have an accommodating Federal Reserve than a growing and vibrant economy.  We shall see.  Earnings start coming with Alcoa's release next week so traders will have much to digest over the next few weeks.  As our recent newsletters have pointed out, the last three years have started much the same with large gains in the first quarter and large corrections in the second quarter.  Are we getting ready to see a repeat of the last few years?  Time will tell. 

Chart of the Day - Which countries have recouped all financial crisis losses?

Chart of the Day - Which countries have recouped all financial crisis losses?

BAM Market Wrap

SAME SONG DIFFERENT VERSE?

DOW HITS RECORD HIGHS

Can it last?

A couple of interesting articles.

High on Steroids

Then and Now

IS THIS IT?

Our most recent newsletter indicated that a correction was likely.  Is the selling of yesterday and today the start of the long-awaited correction to the great start this year?  With just over an hour left in trading, a few significant trading levels have been breached.   For the S&P, the 20 day moving average at 1507 was crossed early in the trading session and the Dow has fallen below the psychologically important 14,000 level with yesterday's losses.  The S&P was below 1500 earlier today but is trying to rally back above that important level.  Often, the last 30 minutes of trading gives a good indication of where the market wants to go so we will be watching the close carefully.  The bulls will need to finish with some strength in order to quell the losses.  As we have discussed recently, a correction along the lines of 5-7% would be normal considering the recent advance and, indeed, would be healthy for the longer term prospects of the market as it would give a good entry point for some of the money still left on the sidelines. 

Many in the financial press are pointing to the release of the Federal Reserve minutes yesterday as the cause for the recent selling.  While the minutes were a little unsettling as some of the members indicated disagreement with the continued easy money provided by the Fed, we don't believe the minutes were all that significant but rather just a reason for those nervous about the steep rise in the markets to take some of their profits. 

Watch the close for whether or not the correction has started or if this is just a little profit taking. 

WHY ACTIVE MANAGEMENT?

In times when the market is moving up on a steady basis, we are often asked why not just use a buy and hold approach?  It is a very good question and one that the financial media often espouses.  It should be noted that the financial media is largely supported by the advertising dollars of the financial industry which would love nothing more than for investors to buy their funds and hold to perpetuity!  However, not to be completely jaded, let's take a look to see if the buy and hold mantra holds true in actual real life situations. 

Let's say that an investor has $100 to invest and an 8 year time frame.  Furthermore, let's assume that the markets follow the usual trend of 3 up years for every 1 down year.

The market returns are:

Yr. 1     10%
Yr. 2       5%
Yr. 3     15%
Yr. 4    -25%
Yr. 5     15%
Yr. 6       5%
Yr. 7      15%
Yr. 8     -15%

Adding up the returns it appears that you have made 25%.  However, the math works much differently.

Yr 1	$110.00
Yr 2	$115.50
Yr 3	$132.83
Yr 4	$99.62
Yr 5	$114.56
Yr 6	$120.29
Yr 7	$138.33
Yr 8	$117.58

In actuality, because of the effect of losses on the portfolio, the value has gained only 17.58% over the 8 years. Furthermore, it does not matter in which year the losses occur - the results remain the same.

With active management, the advisor seeks to capture some portion of the gains while avoiding the losses.  What would happen if an investment professional were able to capture 75%, 60%, 50% and 40% of the gains in the up markets while avoiding 75% of the down markets?


                      75%         60%         50%         40%

Yr 1	107.50	106.00	105.00	104.00
Yr 2	111.53	109.18	107.63	106.08
Yr 3	124.08	119.01	115.70	112.44
Yr 4	116.32	111.57	108.47	105.42
Yr 5	129.41	121.61	116.60	111.74
Yr 6	134.26	125.26	119.52	113.98
Yr 7	149.37	136.53	128.48	120.82
Yr 8	143.77	131.41	123.66	116.28

As you can see from the table above, capturing as little as 40% of the gains in the up years would yield almost the same level of portfolio gains over the 8 years as a buy and hold investor.  Furthermore, a huge benefit of the active management approach would be the lessened stress and ability to sleep through the bad markets without seeing your portfolio drift down 10, 15 or 25% not to mention the unfortunate investor that had a need for his/her assets in the midst of a bad year like year 4.  Oftentimes, a picture is worth a thousand words.

 


So to answer the question posed by this post - why active management?  Why would an investor choose any other way?  Over time the benefits speak for themselves and Bills Asset Management has a 20 year history of effectively employing active management techniques.

BAM MARKET WRAP

THE TIMES THEY ARE A-CHANGIN'

SUMMARY OF MAJOR TAX CHANGES FOR 2013

Some of the more pertinent and relevant tax changes occurring in 2013 include:

Medicare Surtaxes

A 0.9% Medicare surtax on earned income for higher income earners.

The levy applies to wages and self-employment income and affects single taxpayers with incomes over $200,000 (Married over $250,000).

A 3.8% Medicare surtax on net investment income.

For the same income thresholds above, a 3.8% surtax is imposed on earnings from investment income including interest, dividends, capital gains, annuities, royalties and passive rental income.  The surtax is levied on the smaller of the filer’s net investment income or the amount over the income threshold.

Estate and Gift Taxes

The estate and gift tax exemption increases to $5,250,000.

The annual gift tax exclusion increases to $14,000 per donee.

New Tax Brackets

There is a new 39.6% tax bracket for those individuals making more than $400,000 ($450,000 for married taxpayers filing jointly).

Standard Deduction

The 2013 standard deduction increases to $12,200 for joint filers ($13,400 if one spouse older than 65 and $14,600 if both older than 65) and $6,100 for single taxpayers ($7,600 if over 65).

Phase out of Itemized Deductions

Single income earners of $250,000 ($300,000 if filing joint) will reduce their itemized deductions by 3% of any excess over the income thresholds with the reduction not to exceed 80% of the deductions. 

Personal Exemptions

Personal exemptions rise to $3,900 for filers and their dependents but are phased out for high income earners (same thresholds as the itemized deduction phase out).  The exemptions are reduced by 2% for every $2,500 over the thresholds.

Capital Gains and Dividends

For high income taxpayers (Single over $400,000 and Joint over $450,000) the tax rates rise to 20%.    For other taxpayers, the rate will continue to be 15% with lower rates possible for taxpayers in the 10-15% tax brackets. 

AMT Exemption

The Alternative Minimum Tax exemption increases to $80,750 for couples and $51,900 for single taxpayers.  The exemption level is now tied to inflation and will automatically increase in future years.

Social Security

The Social Security wage base rises to $113,700 for 2013.

Social Security benefits will increase by 1.7%.

Medicare

The basic Medicare Part B premium increases to $104.90 per month.  For higher income taxpayers ($170,000 for couples and $85,000 for singles), the premiums can be as high as $297.40 per month.

Medical Expenses

The threshold for deducting medical expenses jumps from 7.5% of adjusted gross income to 10%.    However, if over 65, the old 7.5% rate continues to apply.

Deductible contributions to Health Savings Accounts rise to $6,450 for family coverage and $3,250 for single coverage.

Health flexible spending accounts are now capped at $2,500.

Savings Accounts

The maximum 401(k) contribution is $17,500 for 2013.

The maximum IRA and Roth IRA contribution limits jump to $5,500 with an extra $1,000 allowed for taxpayers born before 1964.

Businesses and Self-Employed

The standard mileage allowance for business driving is 56.5 cents per mile.

Renewed Tax Breaks

The election to write off state and local sales taxes was revived.

Taxpayers aged 70 ½ and older can continue to directly transfer up to $100,00 tax free from their IRAs to a qualified charity.

More changes are sure to occur throughout the year and we will do our best to point out the most relevant changes on these pages.

FIVE PLUS YEARS LATER AND THE COST OF LOSING MONEY

For some perspective on the post-financial crisis rally, today's chart illustrates how much of the downturn that occurred as a result of the financial crisis has been retraced by each of the five major stock market indexes. For example, the Dow peaked at 14,164.53 back in October 9, 2007 and troughed at 6,547.05 back on March 9, 2009. The most recent close for the Dow is 13,954.42 -- it has retraced 97.2% of its financial crisis bear market decline. As today's chart illustrates, each of these five major stock market indices have retraced over 90% of their financial crisis decline. However, it is the S&P 400 (mid-cap stocks), the tech-laden Nasdaq and the Russell 2000 (small-cap stocks) that have recouped all the losses incurred during the financial crisis and currently trade higher than their 2007 credit bubble peak.  The takeaway - losing money is bad!  It has taken over five years to recover from the losses incurred in 2007/2008 and a big reason why Bills Asset Management strives to avoid losses and manage risk. 

BAM MARKET WRAP

COULD IT GET ANY BETTER?

DEBT CEILING EXAMPLES

These examples have been floating around for a few weeks but I find them rather striking when put into real life examples and reduced to numbers we all can relate to...

Debt ceiling debate in a nutshell … or two *

US Tax Revenue. $2,170,000,000,000
Federal Budget. $3,820,000,000,000
Deficit. $1,650,000,000,000
National Debt. $16,455,000,000,000
Recent budget cuts. $38,500,000,000

Now, let’s remove 8 zeroes from the above, and use it as a household budget

Annual income. $21,700
Bills. $38,200
New credit card debt. $16,500
Family debt. $164,550
Family belt tightening. $385.00

Solution? Call VISA and ask for increase in credit limit

* reasonable approximations from a given point in time.

MUSIC CITY PRESS

NY TIMES TOUTS NASHVILLE

BAM MARKET WRAP

EXTENDED NEW YEAR'S FIREWORKS