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November 9, 2010

Dear Clients and Friends:

The following is a recent statement from the National Bureau of Economic Research on the ending of the recession:

"The Business Cycle Dating Committee of the National Bureau of Economic Research met yesterday (September 19, 2010) by conference call. At its meeting, the committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months…."

The above statement was met with surprise and bewilderment, especially by the millions that are still seeking gainful employment or trying to sell a home. Most recoveries are accompanied by a surge in confidence, an unleashing of pent up demand, and brisk hiring. This recovery lacks all of the above.

The real estate market seems to take one step forward and two steps back. How much more hardship must be endured until prices are supported by strong, fundamental, and reasonably leveraged, demand? The danger of a deflationary economy is manifested when potential buyers stay on the sidelines as prices continue to fall. For the foreseeable future, buyers can no longer count on appreciating home values to bail out poor savings habits.

A stronger job market would go a long way toward a recovery in housing and the general economy. How can we create more household sustaining jobs? We have read the gloomy forecasts for real job growth in this country and understand the challenges faced by our education system and global competition. We remain convinced that America has many strengths, some dormant at the moment, with the potential to unleash strong economic growth.

America’s history of significant economic growth owes much to the entrepreneurial spirit of its citizens. New ideas create new markets that become engines for jobs. We need a rededicated effort to supporting that spirit. This requires smoothing the road for entrepreneurs to go from great ideas to creating products or services that better people’s lives.

Each state’s economic development office should be responsible for fostering entrepreneurial growth. Movers and shakers in the business world, academia, the bar, and higher education, should come together in a joint effort to turn dreams into reality. They can act as a clearing house for reviewing ideas, placing the best on a fast track with the resources and mentoring necessary to succeed.

There is no time to waste. We can no longer rely on the randomness of entrepreneurial success to grow jobs to compete and win in a world economy growing more challenging every day. The effort to restore jobs in this country needs to be on a scale as great as the efforts needed to secure our very freedom in the world wars. Is freedom without meaningful work a freedom worth passing down to our children and grandchildren?

We challenge our leaders in the private and public sectors to work together to support and grow one of our country’s greatest strengths – its entrepreneurs. Jobs will follow.

Investment Commentary

It’s been a great quarter for financial assets across the board. Stocks, bonds, and real assets (commodities, precious metals, real estate) all posted strong gains. It is always sweet when the financial markets rally, but this one leaves a bad aftertaste in our mouths. To justify current prices, one would have to assume that interest rates would stay at these low levels indefinitely, not something prudent investors should count on.

At the time of this writing, the 10-year Treasury bond was yielding around 2.6%. Given the low yield, it certainly is understandable why investors are looking for avenues to squeeze out additional return. At some point, however, returns look so paltry on a forward looking basis, that it pays to heed extra caution. It only takes a modest whiff of inflation for interest rates to reverse course and head higher. Rising treasury yields would impact all asset classes, not just bonds, as they affect borrowing and opportunity costs for both companies and individuals.

The Federal Reserve (the Fed), led by its chairman, Ben Bernanke, is determined to use any tool at its disposal to invigorate the economy and stave off deflation, a significantly greater threat to economic stability and growth than its cousin, inflation.

Ultimately, we are confident they will win the fight, but not without consequences. In its efforts to keep interest rates low, the Fed is seducing investors to take risk. The last time this happened, real estate prices went through the roof, leaping to levels that could never be sustained. In its attempt to re-inflate asset prices, the Fed may be setting us up for an encore.

In short, we continue to play defense against a rising rate environment. This may undoubtedly cause us to underperform in the near term. However, we are more interested in wealth preservation, despite the possibility of underperforming benchmark indexes if markets continue to run.

Donations in Lieu of Holiday Gifts

As most of you know, it is a tradition of ours to deliver a gift basket to all clients during the holiday season, as a sign of our gratitude for allowing us to be of service. Some clients, while expressing their appreciation, have requested that the value of their gift be donated to charity instead.

As you can imagine, the charities that our clients favor are as varied as our client base. It would be an administrative chore, during one of the busiest times of the year, to process checks to a wide variety of charities. Therefore, we have identified a small list of eligible charities for those clients who wish to redirect their gift. This year’s list is as follows:

· The B+ Foundation – Honors the memory of Andrew McDonough by supporting families of critically ill children and increasing pediatric cancer research.

· The PKD Foundation – Dedicated to curing Polycystic Kidney Disease, which effects one out of every 500 people.

· The National Multiple Sclerosis Society – Dedicated to achieving a world free of MS.

· The Kelly Heinz-Grundner Brain Tumor Foundation – A local subsidiary of the National Brain Tumor Society.

If you would like to participate in this program, please call Lauren at the office before Wednesday, November 17th.

Year-End Tax Planning

Our advisors will be engaged in complex year-end tax planning as we deal with uncertainty regarding 2011 tax rates.

There has yet to be a decision on restoring the Alternative Minimum Tax (AMT) exemption to 2009 levels, or on extending the tax-free charitable contributions from IRA accounts to 2010.

Roth conversions are available to taxpayers of every income level this year. We will be reviewing all clients with IRA accounts for Roth conversion opportunities. In addition, taxpayers who convert to Roth accounts in 2010 can elect to include the income from conversion in their 2010 taxable income, or default to include the income from conversion in their taxable income over the two following years, 2011 and 2012.

Required Minimum Distributions (RMDs) from retirement plans are restored in 2010. We will be working on the calculations and assisting clients with making the distributions, along with any tax withholdings, prior to year-end.

Last minute legislation may require additional reviews prior to the close of 2010.

Lauren requested recent paystubs from clients at the end of September. If you have not already done so, please send this to us as soon as possible. Unfortunately, we cannot perform meaningful tax planning without this data.

We cannot overemphasize the importance of clients responding to our requests for information as quickly as possible. Providing you with the best possible service and the best possible recommendations requires a high level of timely cooperation.

We continue to work daily to earn your trust and confidence.

Best Regards,
 
Vincent A. Schiavi, CFP®, CPA/ PFS                 Ravi P. Dattani, CFP®, CPA
President                                                         Vice-President       

Enclosures

 


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