Schwartz Financial Weekly Commentary
May 5, 2014
The
Markets
Sometime
this year, you may have the opportunity to experience an event that’s even more
rare than a lunar or solar eclipse – an economic eclipse. The United States has
had the world’s largest economy since we surpassed Britain back in 1872, but our
economy is about to be overshadowed by China’s.
A
lot of folks were anticipating an economic eclipse sometime around the end of
this decade. As it turns out, the event horizon may be much, much shorter. Last
week, The World Bank released its International
Comparison Program (ICP) report. Every six years, in an effort to measure the
real size of the world economy, the ICP surveys countries and measures their
relative economic might. The ICP report was the final analysis of data
collected during 2011. It found, at that time, the U.S. had the world’s biggest
economy. It also established that China’s economy had grown much faster than
ours between 2005 and 2011. China’s economic growth has continued to exceed
that of the United States. As a result, China’s economy is expected to eclipse
that of the United States during 2014. The U.S. economy will be the second
largest and behind us will be India. The ICP also noted that:
·
The six largest
middle-income economies (China, India, Russia, Brazil, Indonesia, and Mexico)
account for 32.3 percent of world Gross Domestic Product (GDP)
·
The six largest
high-income economies (United States, Japan, Germany, France, United Kingdom,
and Italy) account for 32.9 percent of world GDP
·
Asia and the
Pacific, including China and India, account for 30 percent of world GDP
·
The European
Union and countries in the Organization for Economic Cooperation and
Development (OECD) account for 54 percent of world GDP
·
Latin America
comprises 5.5 percent of world GDP (excluding Mexico, which is an OECD country,
and Argentina which did not participate in the ICP survey)
Some
people are unsettled by the news. Among them, apparently, are members of
China’s National Bureau of Statistics (NBS). According to The Washington Post, the NBS expressed reservations about the
study’s methodology and did not endorse the results as official statistics. As
with solar and lunar eclipses, the event may be notable, but its effects are
unclear.
Data as of 5/2/14
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard &
Poor's 500 (Domestic Stocks)
|
1.0%
|
1.8%
|
17.8%
|
11.4%
|
16.5%
|
5.4%
|
|
10-year Treasury
Note (Yield Only)
|
2.6
|
NA
|
1.6
|
3.3
|
3.2
|
4.5
|
|
Gold (per ounce)
|
-1.5
|
6.6
|
-12.8
|
-6.0
|
7.1
|
12.6
|
|
DJ-UBS Commodity Index
|
-1.0
|
8.7
|
3.9
|
-7.8
|
3.4
|
-1.0
|
|
DJ Equity All REIT TR Index
|
1.9
|
12.8
|
0.9
|
9.8
|
21.2
|
10.2
|
S&P 500, 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.
So, you’ve
heard U.S. companies are fabulously profitable and sitting on record piles of cash. It’s
true. According to Moody’s Investors
Service, non-financial U.S. companies had hoards of cash at the end of 2013
– about $1.64 trillion. That’s about 12 percent more than the previous year’s record-setting
$1.46 trillion. Technology, healthcare/ pharmaceutical, consumer product, and
energy companies held the most cash.
Why are profits at
U.S. companies so high? The Economist
offered several possible explanations:
1) Corporate
executives favored capital and not labor in recent years. An expert cited by The Economist suggested, “…Had pay kept
pace with productivity in recent years, profit margins would be around their
historic average, not close to a 50-year high;” 2) When the U.S. dollar loses
value, which it has, the foreign earnings of American companies get a lift; and
3) Firms have limited their capital expenditures on equipment, software, and
other items. As a result, depreciation charges have fallen making companies
look more profitable.
Why aren’t
companies spending? It has a lot to do with overseas profits and tax rates,
according to The Wall Street Journal’s
MoneyBeat. It reported, “Growth in the cash stockpiles, however, came
largely from operations overseas. Instead of bringing that money back to the
U.S. and paying taxes as high as 35% upon repatriation, companies borrowed
money in the U.S. bond market, where interest rates were historically low. The
report calls that strategy ‘a form of synthetic cash repatriation.’”
The stark reality
is companies are profitable, but they’re also sporting a lot of debt. During
the past three years, corporate debt has risen by $3.67 for every $1 of cash
growth, according to a report from Standard
& Poor’s Rating Services which was cited by The Wall Street Journal. That’s okay when interest rates are low,
but may not prove to be so great when interest rates in the United States move
higher.
Weekly Focus –
Think About It
“I never considered a difference of opinion in
politics, in religion, in philosophy, as cause for withdrawing from a friend.
--Thomas Jefferson, American President
Value
vs. Growth Investing (5/2/14)
|
1.02
|
2.22
|
-0.88
|
5.55
|
20.56
|
13.71
|
19.45
|
|
|
1.01
|
2.29
|
-0.35
|
5.97
|
19.68
|
13.92
|
18.43
|
|
|
0.41
|
2.68
|
-1.15
|
6.27
|
18.44
|
15.68
|
19.30
|
|
|
1.64
|
1.13
|
-0.32
|
4.16
|
22.38
|
14.64
|
19.16
|
|
|
0.93
|
3.15
|
0.43
|
7.64
|
18.24
|
11.52
|
16.92
|
|
|
1.16
|
2.84
|
-1.84
|
5.03
|
22.98
|
13.43
|
22.19
|
|
|
0.99
|
3.87
|
-2.11
|
5.55
|
21.85
|
14.09
|
22.88
|
|
|
1.63
|
0.47
|
-2.88
|
1.68
|
20.84
|
10.70
|
20.68
|
|
|
0.82
|
4.48
|
-0.42
|
8.31
|
26.56
|
15.60
|
22.98
|
|
|
0.76
|
-0.40
|
-3.65
|
2.59
|
22.84
|
12.11
|
21.79
|
|
|
0.50
|
0.85
|
-3.95
|
4.18
|
22.75
|
11.07
|
21.06
|
|
|
1.37
|
-4.26
|
-4.83
|
-1.56
|
23.22
|
11.13
|
20.79
|
|
|
0.45
|
2.16
|
-2.23
|
5.11
|
22.52
|
14.21
|
23.49
|
|
|
0.53
|
2.78
|
-1.54
|
5.98
|
19.40
|
15.05
|
20.20
|
|
|
1.62
|
0.64
|
-1.14
|
3.28
|
22.11
|
13.59
|
19.63
|
|
|
0.88
|
3.34
|
0.07
|
7.59
|
20.23
|
12.53
|
18.58
|
©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:
Estate Planning is for Everybody
If you think estate
planning is only for the very rich, you’re wrong.
Taxes certainly are
higher for large estates but they are not the only reason for estate planning.
Here are seven more, some which may be just as important to you:
1. To plan who
receives what size share of your assets.
2. To decide how
and when your beneficiaries will receive their inheritance or income.
3. To decide who
will manage your estate (executor, trustee, etc.) and be responsible for
distribution of the assets.
4. To reduce
estate administrative expenses and delays.
5. To select a
guardian for your children.
6. To provide
financial management for funds that may pass to grandchildren.
7. To provide
for the orderly continuance or sale of a family business or real estate
investment property.
If you do not have
a plan, state laws will determine who inherits your assets and when they
receive them. The court will appoint a guardian for your children and the
administrator for your estate. Your estate could wind up paying substantial –
and unnecessary – taxes and administrative costs.
Most people feel
strongly about who should inherit their assets and when. However, they are
often less sure about what to consider as they select an executor and trustees.
Your executor is your personal representative after your death and is responsible
for such functions as:
* Administering
your estate and distributing assets to your beneficiaries.
* Paying the
estate expenses and any outstanding debts.
* Ensuring that
all life insurance, employee benefits and retirement plan proceeds are received.
* Filing the
necessary tax returns and paying the appropriate federal and state taxes.
In short, your
executor administers your will. When these duties are met, the job ends.
However, if your will creates trusts to accomplish more long-term goals, you
need a trustee. Your trustee is responsible for managing the trust’s assets and
ensuring the beneficiaries are provided for in accordance with provisions of
the trust. Individuals are often torn between choosing an individual as the
executor or trustee and naming a corporate entity, such as a bank. Many people
name both as executors or co-trustees. Here are the advantages and
disadvantages of each.
Corporate executor
and/or trustee, advantages.
* Specialist in
handling estates and trusts.
* No emotional
bias. Impartial and usually free of conflicts of interest.
* Never moves or
goes on vacation.
* Never dies or
gets sick.
Disadvantages:
* Usually has little familiarity with the
family.
* Administrative fees may be higher.
* Rarely will continue any family-owned
business.
* Rarely maintains real estate requiring
management.
Individual executor
and/or trustee, advantages:
* More familiar with the family.
* Administrative fees may be lower.
* May be familiar with family business
interests.
Disadvantages:
* Probably not experienced in handling estates
and trusts.
* Could have an emotional bias.
* May not be impartial toward all heirs.
* Could have schedule conflicts.
* Could be incapacitated at times.
Consider a living
trust
A living trust (also
known as a self-declaration or revocable trust) is a legal document that
resembles a will. It contains instructions for managing your assets should you
become disabled and directions for the distribution of your assets upon death.
Living trusts have
two major benefits. Assets in a living trust do not go through probate, which
is the process of proving and administering a will under the jurisdiction of a
court. It can be a time-consuming and potentially expensive process. It also
subjects your private financial affairs to public scrutiny. All probate records
are public documents!
A living trust
provides a perfect vehicle for managing your assets in the event of a
disability. While you are alive and well, you can act as your own trustee. In
the event of disability or death, the successor trustee that you selected takes
over.
Estate planning may
include establishing a lifetime gifting program, making the most of the unified
credit or considering charitable trusts.
Before you sit down
with an estate planning attorney, take the time to get educated. One book that
you will find very helpful is J.K. Lasser’s "New Rules for Estate and Tax
Planning."
If you are not
confident all is in order, seek professional advice to alleviate potential
problems down the road.
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
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Michael
L. Schwartz, RFC, CWS, CFS, a registered principal offering securities and
advisory services through Independent Financial Group, LLC., a registered
broker-dealer and investment advisor.
Member FINRA-SIPC. Schwartz Financial and Independent Financial Group
are unaffiliated entities.
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.
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