Schwartz Financial Weekly Commentary 7/14/14

Schwartz Financial Weekly Commentary

July 14, 2014

 

The Markets

 

Germany may have clobbered Brazil in the World Cup quarterfinals last week, earning a chance to become the first European team to win the event in Latin America, but things back home in Europe weren’t quite so rosy.

 

First, a sizeable Portuguese bank startled investors when it failed to make an interest payment on its short-term debt. Investigators have found financial irregularities at the bank’s parent company and don’t believe the problem is systemic, according to Barron’s.

 

“…but jittery investors didn't hang around to find out the true picture. The missed bond payment sparked an indiscriminate selloff among financials across Europe. Banks in countries at the periphery of the euro zone were particularly hard hit, but the ripples washed over markets at the core, too.”

 

In addition, Reuters reported a Spanish bank cancelled its bond offering and Greece was only able to place one-half of its debt issue as a wake of uncertainty about Europe’s financial system buffeted investors.

 

Worries in Europe intensified when industrial production numbers came in below expectation. In Germany, production fell by 1.8 percent. In France, it was off by 1.7 percent, in Britain by 1.3 percent, and in Italy by 1.2 percent. Weak industrial production is a sign the European economy is struggling to find solid footing. By the end of last week, European financial companies had lost 3.7 percent of their value and the Stoxx Europe 600 Index was down 3.2 percent.

 

U.S. markets moved lower last week, too, as reminders of Europe’s banking crisis renewed investor fear. Barron’s suggested investors’ skittishness also had something to do with the fact that Standard & Poor’s 500 Index has not experienced a 10 percent correction for more than two years. Corrections typically occur about every 25 months helping to, “…wipe out some of the frothy sentiment, reset expectations, and prepare the way for another move higher.”

 

Data as of 7/11/14	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	-0.9%	6.5%	17.5%	14.3%	16.9%	5.9%
10-year Treasury Note (Yield Only)	2.5	NA	2.6	2.9	3.4	4.4
Gold (per ounce)	1.3	11.1	3.9	-5.0	8.0	12.6
Bloomberg Commodity Index	-3.0	3.5	1.2	-6.6	2.7	-1.1
DJ Equity All REIT Total Return Index	0.9	17.1	9.3	11.2	24.6	9.5

S&P 500, Gold, Bloomberg 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 Total Return 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.

 

what is the value of higher education? does it justify the cost? It appears the value of education is in the eye of the beholder. Aristotle thought education was about learning to think. He said, “It is the mark of an educated mind to entertain a thought without accepting it.” Nelson Mandela, who helped lead South Africa out of apartheid, said, “Education is the most powerful weapon you can use to change the world.” Ben Franklin wrote, “An investment in knowledge pays the best interest.” On the other hand, Abe Lincoln was self-educated and Mark Twain belittled school boards.

 

The cost and value of higher education have become issues for debate in recent years. During the 2013-14 school year, the average cost of tuition, room and board, and fees at a four-year public, in-state university was more than $18,000 per year or about $72,000 for four years. At a four-year private non-profit university, the cost was almost $41,000 per year or about $164,000 over four years. That’s a hefty chunk of change even without adding the interest owed on student loans and it has left some parents and students wondering whether it was money well spent.

 

James Altucher, a venture capitalist, Cornell graduate, and father of two young children, wrote an article questioning the value of college. He suggested young people choose not to attend college and instead start businesses, travel the world, and create art, among other things. He has since become one of the leaders of the ‘anti-college’ crusade, said New York Magazine. When asked about his stance on higher education, he told the publication he was trying to reduce demand for college so costs would go down.

 

Skipping college may not be the best idea. As it turns out, more than 98 percent of the world’s millionaires went to college, according to a 2013 study from Spear’s magazine and WealthInsight, a consultancy group. Just over one percent took a pass on higher education or dropped out before graduating. The dozen colleges and universities with the most millionaire alumni are:

 

·         Harvard University

·         Harvard Business School

·         Stanford University

·         University of California

·         Columbia University

·         University of Oxford

·         Massachusetts Institute of Technology

·         New York University

·         University of Cambridge

·         University of Pennsylvania

·         Cornell University

·         University of Michigan

 

Millionaires who participated in the survey typically studied engineering, business, economics, and law, although many did not pursue careers in their fields of study. According to a Spear’s editor, “Entrepreneurs, who ultimately end up being the wealthiest in the world, are innovators, and the top subjects are those which encourage new and smart thinking, whether technical or financial.”

 

Weekly Focus – Think About It

 

“It had long since come to my attention that people of accomplishment rarely sat back and let things happen to them. They went out and happened to things.”

--Leonardo da Vinci, Italian inventor

 

Value vs. Growth Investing (7/11/14)

Name			1-Week	YTD	4-Week	13-Week	1-Year	3-Year	5-Year
US Market			-1.14	7.19	1.19	8.59	19.76	16.49	20.47
Large Cap			-0.82	7.53	1.38	8.97	19.68	16.82	19.33
Large Core			-0.70	7.57	1.22	7.45	17.20	18.68	19.87
Large Growth			-1.01	7.90	1.69	11.99	25.52	17.43	20.20
Large Value			-0.72	7.14	1.28	7.42	16.35	14.46	18.03
Mid Cap			-1.59	7.44	1.07	8.08	21.08	16.02	23.62
Mid Core			-1.27	9.68	1.61	9.07	22.84	17.23	24.59
Mid Growth			-2.43	4.08	0.46	7.08	17.13	12.11	21.81
Mid Value			-1.06	8.90	1.10	8.10	23.66	18.90	24.47
Small Cap			-3.32	2.89	-0.39	5.94	16.55	14.21	22.78
Small Core			-3.17	4.78	-0.41	6.30	16.95	13.43	22.36
Small Growth			-4.33	-1.60	-0.39	5.53	13.92	12.72	21.01
Small Value			-2.48	5.44	-0.35	6.00	18.62	16.56	25.01
US Core			-0.99	7.79	1.18	7.69	18.29	18.05	21.04
US Growth			-1.51	6.50	1.31	10.57	23.00	16.01	20.64
US Value			-0.91	7.37	1.13	7.46	18.00	15.50	19.80

 ©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:

 

Prepare for the "Claw Back" Credit

 

Is a tax surprise of over $1,000 in your future?

Millions of taxpayers may see a surprising tax bill in 2014 as the Federal government asks them to repay (claw back) some or all of the new health insurance Premium Tax Credit claimed on the Affordable Care Act insurance exchanges. Could this impact you or someone you know? If so, here is what you need to know.

Background

A core part of the Affordable Care Act (ObamaCare) was the establishment of a Health Insurance Marketplace where the uninsured shop and sign up for health care insurance. Some states created their own online system while other states opted for the Federal website known as the Federally-facilitated Marketplace (FFM). When using the Marketplace, qualified participants could apply a new insurance Premium Tax Credit to reduce their health insurance bill. Millions of taxpayers are receiving this tax credit each month. The credit can be paid directly to health insurance companies to reduce monthly health insurance premiums.

The Insurance Premium Tax Credit Problem

Per a recent report from the Department of Health and Human Services, over 85% of the eight million participants who selected health insurance in the new Marketplace tool are using the new Premium Tax Credit to help pay their monthly premium. The qualifications to receive the tax credit are based on self-reported income. The contractor hired by the government to audit this information (Serco) is reporting over 4 million discrepancies between what is claimed on the insurance enrollment to qualify for the tax credit and what can be found in government records about these individuals. The problems consist of:

• Mismatching income
• Incorrect Social Security numbers
• Residency and immigration problems
• Conflicts with other federal health programs

Action Steps

If you are currently receiving your health insurance through these new exchanges and have been using the Premium Tax Credit to reduce your premium, please consider the following;

• File a tax return. Many taxpayers that did not need to file a tax return in prior years must now do so to correctly establish qualifications to receive the Premium Tax Credit.
• Confirm your health enrollment form. If you have been using the health insurance Premium Tax Credit, review your initial enrollment form. Is it still accurate? If not, please make the necessary corrections now. While it will not alleviate the need to repay some of the excess credit you received, it will help keep the tax credit repayment problem from getting any bigger over the balance of the year.
• Changes in your situation. If you have any change in your situation, review and update your health insurance enrollment information. This includes, at minimum, a death, birth, marriage, or divorce in your family.
• Plan for the claw back. You may wish to forecast your potential credit repayment risk. The recent government study shows that the current insurance Premium Tax Credits are reducing insurance premiums by 76% with a monthly tax credit of over $221. As an example, if an error is found on your application that requires a 50% repayment of the credit, you could face a federal claw back tax bill of over $1,300.

The government is currently trying to work through the reported inconsistencies on enrollment forms. Should you receive notice from the government please ask for help. The financial impact of waiting could cause an unpleasant surprise at tax time.

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. 

 

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.

 

* 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”.