Congressional Super Committee

You’ve probably heard about the U.S. debt-ceiling crisis. You may not have heard the steps the government has taken to solve it. The media has floated around a lot of terms like “super committee” and “trigger mechanism” lately, and unless you’re following closely, it can be hard to know just what exactly is going on.

In early August, Congress was embroiled in a bitter debate about the U.S. public debt nearing the so-called “debt ceiling.” Simply put, the debt ceiling is the utmost limit that the public debt is allowed to reach. Under normal circumstances, the ceiling is decided each year by Congress with a minimum amount of fuss. However, this year the decision was made only after intense arguing in Washington. On August 2^nd, Congress voted in favor of, and President Obama signed, the 2011 Budget Control Act, which raised the ceiling by $400 billion dollars through 2013. This averted the only U.S. default in history.¹

Raising the debt ceiling was not the only thing the Budget Control Act did. Recognizing that the solution was temporary, Congress also mandated a deficit reduction plan that would find $1.5 trillion in budget cuts over the next decade. To come up with this plan, Congress authorized the formation of a special committee titled, The Joint Select Committee on Deficit Reduction, referred to in the press as the “super committee.”²

The plan went like this: There would be twelve members total, six from the Senate and six from the House. The twelve would be equally divided between Republicans and Democrats. Because of the small size (as compared to the 535 members of Congress), it was thought that the committee would be better able to come up with a plan that would satisfy both parties. Dialogue, debate, and research could be carried out with more cooperation and less partisanship. The committee’s plan would be recommended to Congress as a whole, and it would be immune to most of the tactics politicians use to stall a bill they don’t want passed.

Unfortunately, the committee failed. By November 21^st, the committee admitted that no plan could be decided upon, and indeed much of the committee’s time seemed to be spent pointing fingers at each other.

^1,2 http://tinyurl.com/8xvxs4p

Political analysis isn’t part of my job as a financial advisor. What is my job is to stay properly informed, and to pass that information on to you. To that end, I want to make sure you understand what’s going to happen next, and how it affects you.

As you can imagine, the markets didn’t take the failure very well. Before the committee had even announced the news, all three major indexes fell more than 2%, based on rumors of the impending admission, with the Dow hit especially hard, at times tumbling over 250 points.³ It’s impossible for me to predict what the markets will do next, but I think it’s a safe bet that as long as Congress seems incapable of action, investors will continue to be jittery. Another worry is that credit-rating agencies like Moody’s and Fitch will downgrade the U.S. debt, much like the S&P did back in August.⁴ While it’s unknown what direct consequences these downgrades might have, it’s certain that they would contribute to the public’s lack of confidence in the economy, thereby driving the markets even lower.

Similarly, we don’t know what Congress is going to do next. The Budget Control Act specified that, should the committee fail to come up with a plan, across-the-board spending cuts equaling $1.2 trillion would be automatically enacted. This is the “trigger mechanism” you might have heard about. While these cuts would reduce the deficit, it’s not something that either party wants. “Across-the-board” means exactly that: cuts would come out of both defense and non-defense spending. Given the fact that 2012 is an election year, neither party wants programs they consider sacred to lose out. It’s possible that Congress will attempt a handoff and vote to eliminate the cuts, meaning that the debate will be postponed, yet again, for another year.

It’s hard to find any silver lining in this news, but I want you to know that my team and I are working constantly to find ways to protect your money. We don’t know what the markets will do, and we can’t control what Congress does, but what we can control is our approach to investing. We are constantly appraising that approach, to make sure that it works for you. We’ll continue to stay up-to-date with the latest news and developments, and pass on what we learn to you.

I want you to be informed. So, if you have any questions about the super committee or the markets in general, please don’t hesitate. Call my office at 215-886-2122. I would love to hear from you.

Schwartz Financial Weekly Commentary 11/21/11

 The Markets

“Printing money is really just a softer method of default, because it effectively converts the meaning of default from ‘getting less than 100% of the currency you were owed’ to ‘getting all the currency you were owed, but ending up with less than 100 percent of the purchasing power you expected.’”

--John Hussman

They say money doesn’t grow on trees, but, for some governments, it metaphorically does. Earlier this year, the U.S. Federal Reserve completed a $600 billion “quantitative easing” program, which is a fancy way of saying “money printing,” according to Forbes. Similarly, the Bank of England recently announced an additional 75 billion pound sterling quantitative easing program on top of an earlier 200 billion program, according to The Wall Street Journal.

 

These programs are designed to help reduce long-term interest rates and boost the economy. Critics say they may lead to hyperinflation.

Now, some folks are saying a similar money printing program is the only way to solve the eurozone debt crisis.

As the sovereign debt crisis spreads in Europe, government bond interest rates are rising above what’s considered a sustainable level. Rates are rising because bond buyers are scarce; they’re concerned that certain governments may default on their payments so they demand a higher rate to compensate for the risk of default.

If demand for government bonds drops too much, then some countries may have to default because they won’t have enough money to pay their bills. That’s where the European Central Bank (ECB) may have to step in.

The ECB is the central bank for 11 national central banks, each serving its own country. Those 11 national central banks are the original members of the Eurozone, according to CNBC.

As a highly respected organization, the ECB could step in and say it will back its member countries’ debt and buy that debt in unlimited quantities to keep interest rates down. If it did, then the current crisis would likely abate (at least temporarily) and give the troubled countries some breathing room to implement reforms and restart economic growth, according to Reuters.

So far, though, the ECB has declined to make such a statement for several reasons:

1.      It might undermine its independence from politics and its price stability mandate.

2.      It could push up eurozone inflation.

3.      It would reduce pressure on wayward countries to cut spending and implement growth-boosting structural overhauls.

Sources: Reuters, The Wall Street Journal

In short, it’s “politics as usual” in Europe. Meanwhile, as Europe fiddles, the markets remain unsettled.

Data as of 11/18/11	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	-3.8%	-3.3%	1.3%	12.3%	-2.8%	0.5%
DJ Global ex US (Foreign Stocks)	-3.9	-16.5	-13.8	12.0	-4.0	4.4
10-year Treasury Note (Yield Only)	2.0	N/A	2.9	3.5	4.6	4.8
Gold (per ounce)	-3.0	21.9	27.3	32.6	22.4	20.2
DJ-UBS Commodity Index	-2.7	-10.8	-1.1	5.8	-2.9	4.9
DJ Equity All REIT TR Index	-3.2	1.8	7.6	27.0	-2.3	9.9

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable.

HERE ARE A FEW QUOTES from top investors that are worth pondering:

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”

--Warren Buffett

“In investing, what is comfortable is rarely profitable.”

--Robert Arnott

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

--Sir John Templeton

“Your success in investing will depend in part on your character and guts, and in part on your ability to realize at the height of the ebullience and the depth of despair alike that this too shall pass.”

--John Bogle

“You make most of your money in a bear market, you just don’t realize it at the time.”

--Shelby Cullom Davis

“To achieve long-term success over many financial market and economic cycles, observing a few rules is not enough. Too many things change too quickly in the investment world for that approach to succeed. It is necessary instead to understand the rationale behind the rules in order to appreciate why they work when they do and don't when they don't.”

--Seth Klarman

Weekly Focus – Think About It

“It is one of the paradoxes of success that the things and ways that got you there are seldom those that keep you there.”

--Charles Handy, Irish author/philosopher

Value vs. Growth Investing (11/17/11)

Name	1-Week	YTD	4-Week	13-Week	1-Year	3-Year	5-Year
US Market	-1.75	-1.81	1.84	2.36	5.36	16.45	-0.08
Large Cap	-1.81	-1.09	1.28	2.41	5.50	14.12	-0.66
Large Core	-1.10	-0.84	2.46	3.48	5.41	13.72	0.46
Large Growth	-1.79	0.49	-0.03	3.28	7.35	19.23	1.35
Large Value	-2.76	-3.56	1.30	0.08	3.15	9.46	-4.09
Mid Cap	-1.72	-3.22	2.98	1.87	4.99	22.84	1.27
Mid Core	-1.76	-1.60	4.09	3.25	7.40	24.77	1.80
Mid Growth	-1.68	-1.49	2.09	1.45	6.72	24.51	2.80
Mid Value	-1.71	-6.70	2.72	0.83	0.68	19.08	-1.08
Small Cap	-1.20	-5.48	4.81	3.18	4.30	22.68	1.19
Small Core	-1.38	-7.73	4.32	0.92	1.91	22.50	-0.13
Small Growth	-0.91	-2.52	4.10	4.75	8.19	23.24	2.34
Small Value	-1.31	-6.02	6.08	4.09	2.87	22.23	1.06
US Core	-1.24	-1.42	2.87	3.27	5.65	16.47	0.83
US Growth	-1.71	0.02	0.64	3.02	7.47	20.64	1.79
US Value	-2.44	-4.39	1.93	0.52	2.61	12.21	-3.10

©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

Office Notes:

How Much Is Your Social Security Really Worth?

Social Security is far more valuable than it used to be, and not just because of the 3.6% COLA announced last week. Scott Burns, in his October 2 column, "How Much are Social Security Benefits Really Worth?" asks how much cash you would need to generate the same amount of income that Social Security provides. It's a simple question of present value in the face of lower interest rates.

Back in 2000, when the yield on five-year Treasury obligations was 6.16%, you needed a lump sum of $162,843 to generate income equal to the average Social Security benefit of $840 per month. Today, with yields at 1.0%, you would need $1.4 million to get essentially the same income (the average benefit is now about $1,181).

The dramatic reduction in interest rates has not only lowered the discount rate that makes a future income stream more valuable, it has increased the relative importance of Social Security as a source of retirement income. The $100,000 IRA that would have earned $6,160 in 2000, now earns only $1,000 a year. Higher returns are available elsewhere, of course, but not without risk. The result is that for most people Social Security is likely to comprise a larger slice of the retirement income pie.

Many baby boomers are dealing with the unfortunate math caused by today's low interest rates by continuing to work. So for now, Social Security—for those who have started collecting—still represents a small slice of the retirement income pie. But at some point the earned income will stop. When that happens Social Security will step up to comprise a greater share of retirement income—40%, 50%, maybe even more. And that's when we hope you will be thankful to offices like ours for potentially helping maximize your benefits. Our goal is to lead clients into decisions that improve their future income stream, my office attempts to add to your wealth striving to increase the value of your retirement and investment accounts.

GAO says benefits from 62 to 66 wouldn't buy equivalent annuity

In their report, Retirement Income: Ensuring Income throughout Retirement Requires Difficult Choices, the Government Accountability Office says that the amount of money a retiree would receive by taking early benefits is less than the amount needed to purchase an annuity that would provide the additional income that would be available by waiting. As the graph below shows, an early claimer who receives $12,000 a year in benefits would receive an extra $48,000 from age 62 to 66. But he'd have to spend $71,000, or 47% more, to buy an annuity that would generate the $4,000 in additional income he would receive by applying for benefits at 66.

***Keep in mind once again the above is dependent on the current interest rate and the outcome might change in a different interest rate environment.

Best regards,  

Michael L. Schwartz, RFC®, CWS®, CFS

P.S.  Please feel free to forward this commentary to family, friends, or colleagues.  If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added. 

Securities and advisory services offered through First Allied Securities, Inc., Member FINRA/SIPC

Schwartz Financial Service, Inc is not an affiliate of First Allied Securities, Inc.

This information is provided for informational purposes only and is not a solicitation or recommendation that any particular investor should purchase or sell any security. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed.  Any opinions expressed herein are subject to change without notice.  An Index is a composite of securities that provides a performance benchmark.  Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment.  Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly.  Past performance is not a guarantee of future results.

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. 

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Past performance does not guarantee future results.

* You cannot invest directly in an index.

* Consult your financial professional before making any investment decision.

* To unsubscribe from our “market commentary” please reply to this e-mail with    “Unsubscribe” in the subject line, or write us at “mike@schwartzfinancial.com”.